The literature views many African cities as dysfunctional with a hodgepodge of land uses and poor “connectivity.” One driver of inefficient land uses is construction decisions for highly durable buildings made under weak institutions. In a novel approach, we model the dynamics of urban land use with both formal and slum dwellings and ongoing urban redevelopment to higher building heights in the formal sector as a city grows. We analyze the evolution of Nairobi using a unique high–spatial resolution data set. The analysis suggests insufficient building volume through most of the city and large slum areas with low housing volumes near the center, where corrupted institutions deter conversion to formal sector usage.

This paper overviews the role of slums in urban Africa, focusing on Nairobi. It reveals the characteristics of slums and how these have changed over time. Spatially disaggregated data show that slum areas are very dense with poor-quality buildings, lacking access to key services such as sewage disposal and electricity. However, improvements to building quality, public-service provision, and socioeconomic characteristics are mostly outpacing those seen in the formal sector. Measures such as child health and school attendance have caught up or are on pace to catch up in the near future with the formal sector, while improvements in building quality and service provision are advancing more slowly. We find significant heterogeneity across the city, and in particular that central slums look to be 'stuck' with low-quality buildings and poor service provision, though not with low socioeconomic indicators. We explore potential explanations for why slums located on highly prized land near the centre may be stuck with poor infrastructure.

We model the building of a city, estimate parameters of the model, and calculate welfare losses from institutional frictions encountered in changing land-use. We distinguish formal and slum construction technologies; in contrast to slums, formal structures can be built tall, are durable, and non-malleable. As the city grows areas are initially developed informally, then formally, and then redeveloped periodically. Slums are modelled as a technology choice; however, institutional frictions in land markets may hinder their conversion to formal usage that requires secure property rights. Using unique data on Nairobi for 2003 and 2015, we develop a novel set of facts that support assumptions of the model, estimate all parameters of the model, and calculate welfare losses of conversion frictions. We track the dynamic evolution of the city and compare it with model predictions. In the core city formal sector, about a third of buildings were torn down over 12 years and replaced by buildings on average three times higher. For slums in older areas near the centre, even after buying out slumlords, overcoming institutional frictions would yield gains amounting to about $18,000 per slum household, 30 times typical annual slum rent payments.

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