Location Preferences and Slums Formation: Evidence from a Panel of Residence Histories

Slum dwellers may decide to live in slums due to location preferences, even though they have access to subsidized housing in the city outskirts. We examine this hypothesis by studying the evolution of location choices across slum and subsidized housing dwellers, for which we construct a panel of residential trajectories that spans between 1960 and 2008 in Santiago, Chile. While slum and subsidized housing dwellers are born in municipalities with statistically comparable levels of wealth, labor force participation, and share located in the inner urban zone, we find that slum dwellers are more likely to end up living in municipalities located in the inner city, with lower poverty levels, and higher levels of labor force participation. Consequently, employment rates among slum dwellers are significantly higher. Still, slum dwellers show inferior housing. From a revealed preferences approach, this result suggests that slum dwellers are willing to consume lower quality housing for geographical access to better labor opportunities. We further examine this hypothesis by using a trade-off game designed to elicit stated-preferences for location (relative to housing) and find that, consistent with their revealed preferences for location, slum dwellers are significantly more likely to prioritize location quality over housing quality than their subsidized housing counterparts. Overall, our results suggest that location preferences play a non-negligible role in slums formation.