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Building the city: sunk capital, sequencing andinstitutional frictions


  • Henderson, J. Vernon
  • Regan, Tanner
  • Venables, Anthony J.


This paper models a growing city, and focuses on investment decisions and consequent patterns of land use and urban density. We distinguish between formal and informal sector construction. The former can be built tall (at a cost), but structures once built are durable and cannot be modified. Investments are based on expectations about future growth of the city. In contrast, informal structures are malleable and do not involve sunk costs. As the city grows areas will initially be developed informally, and then formally; formal areas are redeveloped periodically. This process can be hindered by land right issues which raise the costs of converting informal to formal sector development. The size and shape of the city are sensitive to the expected returns to durable investments and to the costs of converting informal to formal sector usage. We take the model to data on the built environment for Nairobi, to study urban growth and change between 2004 and 2015 in a context where population is growing at about 4% a year. We study the evolution of building footprints and heights, development at the fringe, infilling, and redevelopment of the formal sector.

Suggested Citation

  • Henderson, J. Vernon & Regan, Tanner & Venables, Anthony J., 2016. "Building the city: sunk capital, sequencing andinstitutional frictions," LSE Research Online Documents on Economics 66536, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:66536

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    References listed on IDEAS

    1. Solow, Robert M. & Vickrey, William S., 1971. "Land use in a long narrow city," Journal of Economic Theory, Elsevier, vol. 3(4), pages 430-447, December.
    2. Riley, John G., 1974. "Optimal residential density and road transportation," Journal of Urban Economics, Elsevier, vol. 1(2), pages 230-249, April.
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    Cited by:

    1. Dave Donaldson & Adam Storeygard, 2016. "The View from Above: Applications of Satellite Data in Economics," Journal of Economic Perspectives, American Economic Association, vol. 30(4), pages 171-198, Fall.
    2. Venables, Anthony J., 2017. "Breaking into tradables: Urban form and urban function in a developing city," Journal of Urban Economics, Elsevier, vol. 98(C), pages 88-97.

    More about this item


    city; urban; urban growth; slum development; urban structure; urban form; housing investment; capital durability;

    JEL classification:

    • R14 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Land Use Patterns
    • J01 - Labor and Demographic Economics - - General - - - Labor Economics: General

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