Private Cities : Implications for Urban Policy in Developing Countries

Institutional weaknesses limit the capacity of local governments to support efficient urbanization in developing countries. They also lead to the emergence of large developers with the clout to build entire cities. This paper models the urbanization process when local governments are weak and large developers are powerful in a non-cooperative game setting. Multiple equilibria can emerge depending on key institutional parameters of the model and the nature of the game, but all of them result in under-urbanization. In this simple setting, banning private city development may prevent city formation altogether, whereas increasing the capacity of the local government may crowd out urban land development by the more effective private investor. Efficiency can be ensured by subsidizing the large developer, but this makes the rest of society worse off. Selling the rights to the city can be Pareto efficient, but only provided that the price is sufficiently high