Selod 2009, Brueckner 2013, Shah 2014).<sup>7</sup> Departing from the restricted focus on squatters, Selod and Tobin (2015) model the formalization choices of households in a context where land plots may be appropriated by others due to multiple sales. In their model, higher endogenous land prices in the core city provide greater incentives to formalize than at the periphery. Because all these models are static—with the only exception of Turnbull (2008), who explores the strategic choices of landowners regarding the timing of squatter eviction—none of them accounts for the transformation of property rights over time under evolving land prices.

Our paper fills this important gap by proposing a theory that accounts for the joint dynamics of urbanization and the evolution of property rights. We model urbanization through the migration of heterogeneous agents from a representative rural area to a representative city. The prevalence of land tenure informality is determined by urban dwellers’ decisions whether and when to purchase a property right. As land prices increase with agglomeration, formalization becomes more desirable. However, formalizing may be too costly for less productive workers. These workers who may not be able to afford both a land plot and a land title, will postpone the decision to formalize, making themselves potential prey to land grabbers. The model can flexibly account for the variety of situations regarding urbanization dynamics as its behavior critically depends on key parameters regarding institutional quality (the cost and enforcement strength of land property rights), the potential for agglomeration effects, and macroeconomic uncertainty. Contrary to the modernization view of slums, and in line with the observation that “informality may be here to stay”, it allows us to exhibit plausible contexts in which land tenure informality remains in the long run. Deconstructing common-sense intuitions, the model also sheds lights on situations where some level of informality is actually socially desirable. This is because, under the parameters of the economy, informality provides access to the city to low income workers who would not be able to contribute to the urban economy under compulsory formal property rights. In this context, enforcement of strict eviction policies would be counter-productive. The model also provides insights into leaving urbanization to the market, which can be suboptimal under adverse structural parameters, in particular when the potential for agglomeration is low and when land administration charge high fees.

The rest of the paper is organized as follows. Section 2 below presents the model which takes the form of a discrete-time dynamic stochastic game under infinite time but a finite number of states and actions. Section 3 then presents our concepts of social planner and decentralized solutions. Section 4 explains our calibration before Section 5 presents the main results from simulations.

# **2 The model**

We consider an economy with a set of _N_ individuals. Individuals live forever and may either reside in the rural area or in the city. In the city, individuals are exposed to a risk of conflict

> 7For a detailed survey, see Brueckner and Lall (2014).

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