Private Cities : Implications for Urban Policy in Developing Countries

Institutional weaknesses limit the capacity of local governments to support efficienturbanization in developing countries. They also lead to the emergence of large developers with the clout to build entirecities. This paper analyzes the urbanization process when local governments are weak and large developers arepowerful. Results from a non-cooperative game setting with minimal assumptions show that multiple equilibria can emergedepending on key institutional parameters of the model and the nature of the game, but all of them are inefficient. Inthis simple setting, increasing the capacity of the local government may not lead to better outcomes, because it maycrowd out urban land development by the more effective private investor. Subsidizing the large investor can ensureefficiency, but it makes the rest of society worse off. Selling the rights to the city can be Pareto efficient, butonly provided that the price at which the rights are sold are sufficiently high. However, more analytical andempirical work is needed before these analyses can be deemed relevant in practice. Competition among jurisdictions, timeconsistency challenges, and the social implications of private cities deserve special attention.