Property rights and market behavior in the low‐income housing sector: Evidence from Chile

• Published date: 01 December 2022
• Author: Diego Gil,Pablo A. Celhay
• Date: 01 December 2022
• DOI: http://doi.org/10.1111/jels.12330

ORIGINAL ARTICLE

Property rights and market behavior in the low-income

housing sector: Evidence from Chile

Diego Gil | Pablo A. Celhay

School of Government, Pontificia Universidad Cat

olica de Chile, Santiago, Chile

Correspondence

Diego Gil, School of Government, Pontificia Universidad Cat

olica de Chile, Av. Vicuña Mackenna 4860, Macul,

7820436, Santiago, Region Metropolitana, Chile.

Email: diego.gil@uc.cl

Funding information

ANID Fondecyt Iniciaci

on, Grant/Award Number: 11180489

Abstract

Recent decades have seen a strong commitment in development theory and practice

toward the idea of promoting homeownership among low-income families, partly based

on the idea that property formalization constitutes an important vehicle for social mobil-

ity and economic development. However, the empirical evidence on this theory is not

conclusive. This paper aims to explore this idea using evidence from Chile, a country that

has shown high success in moving low-income families from the informal to the formal

housing sector. The data for the analysis comes from a comprehensive survey conducted

in 2008 with a representative sample of two groups of low-income households in

Santiago: The first group living in an irregular settlement and the second living in

subsidized formal housing. Through the use of statistical methods that allow comparison

of these samples (matching strategies), we find that market behavior among both

groups are not considerably different. The analysis shows that there are no statistically

significant differences between the two groups with respect to savings and investments in

their homes. The only relevant difference we find is that individuals living in formal

housing have more access to loans from commercial stores relative to informal dwellers.

We argue that the type of geographical relocation to formal housing may affect the

market behavior of low-income owners more than tenure security, in a direction that does

not necessary benefit their socioeconomic situation.

INTRODUCTION

In recent decades, the protection and expansion of private property rights has

become a core part of rule of law programs around the world (Dyal-

Chand, 2007; Trebilcock & Veel, 2008; Xu, 2013). This global trend is based on

DOI: 10.1111/jels.12330

©2022 Cornell Law School and Wiley Periodicals LLC.

1148 J Empir Leg Stud. 2022;19:1148–1178.

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the idea that robust property rights regimes are a critical component of success-

ful capitalist societies (Demsetz, 1967). Therefore, low-income countries should

follow their example by establishing a system in which citizens can participate in

economic transactions with clearly identifiable and protected private property

rights (de Soto, 2000; Deininger, 2003). This idea has had an enormous influ-

ence in the way many governments across the globe have addressed the problem

represented by the extensive, and pervasive, presence of informal settlements in

many urban areas, especially in the Global South. Some governments have

implemented large-scale titling programs to provide tenure security to house-

holds living in urban informality (Field, 2005; Galiani & Schargrodsky, 2010;

Reerink & van Gelder, 2010). Other countries have adopted expansive housing

policies aimed at providing low-income families access to formal housing with

full property rights (Cao & Keivani, 2014; Gil, 2019; Gilbert, 2004; World

Bank, 1993).

The theory behind this development doctrine is relatively simple. Hernando

de Soto, the Peruvian economist who has been one of its most popular advo-

cates, has argued that one important reason why developing countries lag

behind in terms of economic development is that a significant part of the eco-

nomic exchanges in those countries are produced in informal contexts

(de Soto, 2000). He labels the economic activity generated in the informal sector

as “dead capital,”because of the lack of capacity to use the full economic value

of personal assets (de Soto, 2000). De Soto proposes that developing countries

should construct a legal infrastructure that would allow individuals living in

urban informality to use their assets in the formal economic sector, which would

transform those assets into “real capital”(de Soto, 2000). One way of achieving

that goal is through titling programs that provide people with formal ownership

of the place they possess irregularly. According to the theory, this change would

dramatically alter their economic behavior, because holding property rights will:

(a) give owners access to credit from the formal financial sector to finance entre-

preneurial activities by using their properties as collateral; (b) will incentivize

households to make improvements in their homes because they can later capture

the added value generated by those improvements; and (c) will make individuals

feel protected and secured in the place they inhabit, eliminating the need to use

part of their income to obtain extra-legal protection to safeguard their home

(Trebilcock & Veel, 2008). At the same time, the economy overall would expand

by bringing a significant portion of economic exchanges to the formal economy.

The provision of property rights to low-income households has not necessar-

ily met the expectations of the theory. Studies that have assessed the impact of

policies that follow de Soto’s prescriptions have not always found that property

rights transform the economic behavior of individuals in the ways the theory

predicts (Field, 2005; Galiani & Schargrodsky, 2010; Reerink & van

Gelder, 2010; Van Gelder, 2013; Ward et al., 2011). Moreover, a significant

body of literature argues that property rights by themselves do not necessarily

PROPERTY RIGHTS AND MARKET BEHAVIOR 1149