Urban Land Titling: Lessons from a Natural Experiment

Abstract

The literature on economic growth has traditionally focused on capital accumulation and technological change in an institution-free world with perfect property rights. However, the new institutional approach to development economies (see, among others, North 1990), building on the pathbreaking work of Ronald Coase (1960), has recognized that creating, specifying, and enforcing property rights is costly, and, hence, they will never be perfect (see, in particular, Barzel 1997). Therefore, the institutional approach to development now recognizes that in a world with positive transaction costs, which can be understood as representing the resources used to establish and maintain property rights, the provision of property rights affects the allocation of resources. The fragility of property rights is considered a crucial obstacle for economic development. The main argument is that individuals underinvest if others can seize the fruits of their investments. In today's developing world, a pervasive manifestation of feeble property rights are the millions of people living in urban dwellings without possessing formal titles to the plots of land they occupy.Land-titling programs have been advocated in policy circles as a powerful instrument for poverty reduction. De Soto (2000) emphasized that the lack of property rights impedes the transformation of the wealth owned by the poor into capital. Proper titling could allow the poor to collateralize the land. In turn, this credit could be invested as capital in productive projects, promptly increasing labor productivity and income. Inspired by these ideas, and fostered by international development agencies and private institutions, land-titling programs have been launched throughout developing and transition economies as part of poverty alleviation efforts. The important questions are then the following: Are land-titling programs a powerful tool to reduce poverty? In other words, what are the causal effects of urban land titling? Answering these questions is not easy. To identify what would happen to a family if it received the title to the plot of land it inhabits instead of staying on that piece of land without the legal title is complicated methodologically. Identifying the causal effects of land property rights necessitates the assessment of the missed counterfactual, that is, what would have happened in the absence of those rights? Thus, any attempt to answer this question has to compare the outcomes associated with titled and untitled land. However, the allocation of property rights across units is usually not random but, instead, is based on wealth, family characteristics, previous investment levels, or other mechanisms built on differences between the groups that acquire those rights and the groups that do not.