Intro Post by Paula Restrepo

Everyone that has ever set a foot in a slum has realized that – as informal and disorganized as they might seem – things have a way of working. When individual water connections are not provided women find ways to organize collection using available standpipes, and as some of the women leave their homes to work, others take care of their children in informal kindergartens. In the same way, many informal settlements are home to dynamic rental housing markets even though most of the ‘landlords’ collecting rent are not the legal owners of land. The latter is explained by the existence of social contracts that serve – in the absence of legal contracts – to organize transactions and define responsibilities.

While social contracts also exist in the formal city they play a predominant role in economic transactions made in informal environments. Why? Because in the absence of a legal system, communities define social ‘rules’ that allow contracts to emerge. In informal environments social contracts are generally delimited by cultural habits and religious beliefs and are reinforced by ‘power groups’. On the one hand, cultural habits and religious beliefs generally incite individuals to keep their promises since the long term costs of losing one’s reputation is generally higher than the direct cost associated with breaking a given contract. As trust is a form of social capital that is generally, granted at first, but takes a lot of time to regain once lost. On the other hand, when social contracts or promises are broken individuals in informal environments can use local power groups (i.e. gang members, leaders) to either recuperate some of their loss or induce some form of pressure on ‘promise breakers’.

Some evidence from the informal rental market in Medellin:

While I was working on my PhD I found a fantastic database that allowed to test – at some extent – these ideas empirically. This database contained household level information of the poorest of the poor in the city of Medellin, who as expected, live predominantly in informal settlements. The household survey who at the core of the data base had asked households typical questions regarding housing (rooms, materials, etc) and socio-economic status (income, household size, etc) and a very interesting and awkward question regarding the contract agreement made between renters and ‘landlords’. All households were asked if they had made oral or written agreements with ‘landlords’ when moving in. This setting allowed to make an analysis of extra-legal contracts in informal settlements and to determine if renters had different preferences for different type of rental arrangements by comparing written promises to oral promises. I found, a difference in preferences for written versus oral rental agreements in informal settlements evidenced of the existence of a portfolio of social contracts that extent beyond legal frameworks.

Using hedonic prices techniques (1) I found that for identical houses, informal renters having written contract arrangements paid 16.7% more -in monthly rent- than those having oral contract arrangements. While both of these contracts – being in the informal sector – have no legal value, these results reveal that informal renters have a preference for written contracts (or written promises) over oral contracts since they assign higher social contractual value to the first. A further research on informal renters in Medellin showed that renters having oral contracts had a higher perceived risk of being evicted by their ´landlords´ or of being forced to move out due to a sudden and non-agreed raise in rent than those having written contract arrangement. The latter indicates that the 16.7% difference in rent between written and oral contracts is due to a difference in the perceived risks of breaking ´promises´.

Although these results make only a small contribution to the understanding of how social contracts emerge and their meaning  in informal environments, I am convinced that only throught a profound analysis of social relationships can we truly demystify ´slums´. In my next and following posts I will try to develop some subjects which I think are essential to tackle issues related to slums and housing provision in developing countries: rental housing and housing reconstruction following natural disasters.

(1) Hedonic prices theory is a method that allows to reveal consumers preferences for different characteristics of a product. It allows decomposing a complex product (like a house) into its constituent characteristics (rooms, neighborhood characteristics, location, contract agreement), and obtain estimates of the contributory value of each characteristic.

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