A theoretical institution for relocation and eviction of squatter settlement

Katsuhide Nagayama, University of Pennsylvania


Squatter households in developing countries always live with the fear of eviction because of their legal status. Similarly, authorities responsible for planning urban development confront the difficulty of relocating people illegally residing on land planned for development. Rational solutions are needed as an alternative to the prevailing compensation schemes and relocation programs, as they lack a theoretically justifiable basis, and tend to be either autocratic or conciliatory. This study examines a hypothetical institution focusing on this problem, employing micro-economic principles, and then verifies the theoretical implications through empirical analyses in the case of Manila, the Philippines. The institution is assumed to have the policy tools of subsidy and penalty at its disposal. It is assumed that a subsidy is to be provided for the household which decides to move, while a penalty, for the household which continuously stays. A representative household displays expected utility maximizing behavior under a perceived uncertainty of eviction, being offered a policy set of subsidy and penalty. There exists an optimal policy set for a squatter household to decide whether or not it must move or stay. The greater the probability of eviction and the greater the discrepancy in housing prices between the formal and squatter community (informal) markets, the greater the policy set that must be offered. From a social welfare perspective, a zero-subsidy policy causes negative social benefits in both consumer's and supplier's surpluses, however, an excessive subsidy over the optimal level results in bearing unjustifiable economic losses in the society. The empirical work shows that 34% of all squatter households are under pressure to move from their present dwellings. The empirical analysis, based on hedonic pricing techniques, shows that housing prices in the formal market is 5 to 19% higher than those in the squatter community market. Using this price ratio, the optimal relationship between subsidy and penalty was numerically derived. This study provides a theoretical framework for the discussion of the crucial squatter problems that grip many cities in developing countries.

Subject Area

Economic theory|Public policy|Urban planning

Recommended Citation

Nagayama, Katsuhide, "A theoretical institution for relocation and eviction of squatter settlement" (1993). Dissertations available from ProQuest. AAI9321446.