• I am deeply grateful to my advisor, Jan Brueckner, for his constant help, support and encouragement and careful edits; to Manisha Shah and Priya Ranjan for constructive comments on early drafts; and to Ken Small for help with reviewing the literature. I would like to thank the audience of my presentation at the AEA (2012) meetings as well as the wonderful participants, including my referee, Jenny Schuetz, at the USC Rusk School Annual Research Symposium on Global Cities for a very insightful critique of my work. I would also like to thank Yves Zenou and three unknown referees for their constructive suggestions for revising the paper.


This paper presents an economic theory of squatter settlements in developing countries. It adds to the existing literature by explicitly modeling squatting on government-owned land and presents a unified framework for analysis of issues related to squatting, urban planning and policy. In the model, a squatter-organizer optimally controls squatting so as to forestall eviction. The model highlights how the existence of an eviction cost leads to formal residents tolerating squatting, trading-off “open space” to avoid paying taxes toward evicting squatters. The paper derives comparative-static results under some functional form assumptions. The analysis is extended to examine the comparative-static effects for the case where squatters freely migrate into the city. The framework for exploring a combined model of squatting on government and private land is also laid out. Finally, some policy analysis of squatter formalization is carried out.