Issues for discussion

What is the difference between informality and illegality?

Michael Kolocek (University of Dortmund) posited in the PLPR special sessions on the Credibility of Informality that: “institutional forms that are illegal, but considered credible by the states, are more likely to be called informal.”

What about “informality at the top”, i.e. how do power-holders bend rules outside of the formal framework? And what are its effects on credibility?

This is an important, emerging field for study within credibility theory. A typical example of “informality at the top” and its effects on credibility is the case on the expropriation of the indigenous Orang Asli community, and the way how formal procedures for Environmental Impact Assessment were changed to legitimize the construction of the Kelau Dam. Its effects on credibility have been well-documented.


See: Nor Hisham Md Bin Saman and Peter Ho, “A conditional trinity as ‘no-go’ against non-credible development? Resettlement, customary rights and Malaysia’s Kelau Dam”, Journal of Peasant Studies, 2016, Vol. 43, No. 6, pp. 1177-1205.

How is credibility related to transaction costs? Or, can the price of institutional arrangements (e.g. informal housing) be related to transaction costs?

In line with a general transaction costs perspective (and following North’s argument) it may be hypothesized that informal housing – as an institutional arrangement – is economically less efficient than formal housing. In effect, informal housing would lead to higher transaction costs for information, contracting and enforcement (in comparison with formal housing). These higher costs are needed for: i) information on the property (e.g. is the seller the rightful owner?); ii) contracting (e.g. how to track payment of the property transaction from seller to buyer?); and iii) enforcement (e.g. how to monitor and sanction if the seller or buyer violates the contract?). Due to these higher costs for transaction, informal housing is not as easily transacted on the market. As a result, it is transacted against a lower price (= discount) than formal housing.

However, there is a potential problem with this argumentation: there has been such a huge and exploding market in China’s informal housing that one may question whether informal housing is less easily transacted on the market than formal housing. Ergo, does informal housing as an institution really lead to higher transaction costs, and is it, therefore, less efficient?

The credibility theory has a different take on the issue, and would hypothesize two points:

  1. Informal housing does not necessarily lead to higher transaction costs;
  2. The discount (lower price) of informal housing is the result of the function it fulfills for actors, not the transaction costs.

In the context of the above (Fan et al., 2019) has drawn attention to the calculation of endogenous transaction costs.

Discussion on informality at PLPR

Below please find a shortened version of a discussion on informality between PLPR members.

Peter Ho and Rachelle Alterman:

“Informal development is often labeled as inefficient or at most, “second-best” as compared to formal and codified property rights. Yet, the experience in various settings – developed and developing alike – has demonstrated that informality might actually perform an important function amongst social actors, which does not substantially detract from the legal, institutional performance in a socio-economic, cultural or environmental sense.”

Chris Webster:

“Our various research projects looking at ‘small property rights’ housing in China (hundreds of millions of Chinese city dwellers live in this kind of housing) is attempting to measure the informality premium in housing markets and also looking at the institutions that add credibility to housing sales with less than full property rights. One finding so far is that transactions endorsed by the collective village government are considered more credible than other forms of endorsement.”

Benjamin Davy:

“[H]ere are my 5 cents: If there’s an informality premium on land sales (uses), why doesn’t this work in London or Berlin or New York? Or does it?”

Chris Webster:

“My immediate response to your question is that the markets in informal (limited property rights) homes in London, NY and Berlin might be too small to attract a clear market (negative) premium (i.e. Discount). Informal PR homes in London, would include, for example, variations on squatted property (including ‘guardianship’ property rights, where tenants occupy vacant property under special terms in order to prevent illegal squatters occupying the property). Shared- equity homes in London would be another category.”

Neil Harris:

“On the question of informal property rights in London, I completed some research a couple of years ago with planning enforcement officers in London. A key issue related to informal property rights for some of these officers was ‘beds in sheds’, a term used to refer to unauthorised properties located within a usually residential plot. These were of varying degrees of physical permanence and quality – some of very good quality and specification – yet all shared the quality of being unauthorised development. Many are occupied by immigrants. (…).

The ‘beds in sheds’ phenomenon was so prevalent in some boroughs that a team of officers would be working full-time on them, with financial assistance from central government. The phenomenon was a typical ‘cat and mouse’ game between property owners and regulatory enforcement teams – the income generated by letting out informal properties was so significant that it was worth the financial risk of being caught and action potentially being taken…”

Chris Webster:

“Very interesting phenomenon. Are there any statistics on the prevalence of beds in sheds? In HK and China, our informal PR homes have sufficient legality to allow an open market to build around this housing sub market – unlike the London case, where the market is a black one.”

Rachelle Alterman:

“Ines Calor and I have a new paper (…) on illegal development in advanced economy countries (…). Illegality is a reality not only in developing countries. And it merits much more theorizing and empirical analysis.”

Peter Ho:

“Thanks for this very lively discussion on informality, which just demonstrates all the more that it is a really critical issue. (…) The basis from which our research on property rights starts is the ‘Credibility Thesis.’ In other words, the premise that institutions once they have emerged and persist over a certain period, they perform a function for actors and are thus, in essence, credible. If not, they would have changed or gone extinct.

The thesis was formulated in reaction to three postulates of neo-institutional or neo-classical thought, i.e.

1) That institutions can be exogenously designed.

2) That institutional change is characterized by equilibrium.

3) That the form of institutions determines institutional performance.

In contrast, the Credibility Thesis posits:

1) That institutions arise from an endogenous, spontaneously ordered development;

2) That institutional change is characterized by disequilibrium, i.e. in eternal flux, albeit at varying speeds.

3) That institutional Form follows from Function, and not vice versa. In other words, it does not matter if institutions are private or public, formal or informal, secure or insecure. What matters is their Function or what they do and mean for a group of actors at a given time and space.

The Thesis has been used to validate the credibility of China’s agricultural land lease, informal housing, and urban real estate, all of which have been typified as insecure, inefficient, or at times, even “perverse”. By contrast, through the measurement of credibility (done through the FAT Framework and CSI-Checklist), we found:

1) Chinese rural land lease is highly credible despite its insecurity, as it performs a function for social welfare (a finding also critically underscored by Ben’s research in other contexts).

2) Informal housing is equally credible, as it too performs a function in the provision of social security, i.e. access to the city, education, employment, and health care for low-income groups.

3) The property rights or urban real estate are highly ambiguous, yet, have fulfilled a credible function in propelling China’s explosive property development.

There’s, a panel organized at the EAEPE annual conference, which aims to test the Credibility Thesis for different institutions and in different settings, including labor markets in India, state-owned enterprises and banks in China, housing in The Netherlands, and mutual aid societies in Mexico.”

Cathy Sherry:

“This has been an interesting thread. (…) Sydney has been dealing with a similar phenomenon to ‘beds in sheds’. Australia has large numbers of overseas students, but we do not routinely provide students with accommodation, (unlike the US and UK, Australian students do not go away for university and so most campuses have limited residential facilities, and private education providers typically have none). The result is that many overseas students are left in the private rental market, sharing rooms in houses or apartments, with multiple other students or migrant workers. Sometimes they sleep in shifts with more than 10 people sharing a room.

To combat this phenomenon, the new Strata Schemes Management Act 2015 (NSW) contains a provision allowing bodies corporate to limit the number of occupants of apartments to 2 adults per bedroom, although it is unclear how private citizens will police this. Further, as basic property theory would tell us, property is not an optional resource, and property rights produce externalities. Everyone has to have a roof over their head, and by granting a property right to collective apartment owners to exclude people who can only afford this kind of accommodation, the problem is not solved, it is just displaced, (appallingly, sometimes into shipping containers in industrial areas).

The difficulty in Sydney is that no one would want these arrangements to be considered credible, because they violate basic housing standards enshrined in residential tenancies legislation…”

Slavka Sekovic:

“In Serbia there is research about illegal development (illegal construction, illegal/ ‘grey’ economy). In our paper Zekovic et al., 2020 we mentioned that in Serbia there are 1.6 milion illegal buildings (in Belgrade some 400,000 buildings in 2015)!”

Chris Webster:

“I like the Credibility Thesis postulates. One question, though: how would you know if an institution were not credible? Do the measurement devices/variables give sufficient precision? Or is this an empirical work in progress? Our findings so far on the difference in efficacy and price premium between urban village collective endorsed PR and other forms (for example notary), are supportive of the credibility postulates.”

Peter Ho:

Hi Chris, Just a quick reaction (…). The measurement of credibility is done along 2 main dimensions: 1) Actors’ aggregate perceptions of the function of institutions, which is operationalized along the FAT Framework (that is, the “Formal”, the “Actual” and “Targeted” property rights); 2) Actors’ aggregate perceptions of the level of conflict generated by institutions, operationalized along 7 dimensions, including the conflict’s frequency, nature, length, outcome, etc.”

Adam Sheppard:

“Hello all. This is a very rich area for exploration. From the UK perspective the ‘beds in sheds’ phenomenon is indeed very interesting in this context. There is a long running saga that some of you will be very familiar with concerning concealment and involving a certain Robert Fidler in the UK:

Cases such as this led to a change in our regulatory framework: But with mixed results: The issue of active and conscious planning ‘avoidance’ remains a real issue – The motives for pursuing unauthorised development are varied and though I approach this from a practice perspective in general I find the theoretical debate interesting here too and agree there is scope to explore this further…”

See also this paper on informal settlements in the UK.

Rachelle Alterman:

“There is a historical narrative in the UK of interest too; the Plotlands movement: The inadequacy of the regulatory framework was a key element here. Hardy and Ward’s book is a lovely read by the way, should you not have come across it yet.”

Benjamin Davy:

“One more author should be mentioned who has engaged rather early in informality/planning/property research in Europe: Paulo Silva (University of Aveiro, Portugal). His latest publication is with Helena Farrall: Lessons from informal settlements: a ‘peripheral’ problem with self-organising solutions, TPR, 87 (3) 2016 doi:10.3828/tpr.2016.21.

But what exactly does it mean to pursue informality as a research topic? The whole area is loaded with opposing values. Remember, for example, when Cathy said that ‘in Sydney … no one would want these arrangements to be considered credible, because they violate basic housing standards enshrined in residential tenancies legislation.’ Peter Ho and Chris seem to accept that informal housing exists and examine its economic efficiency or social credibility. But this acceptance does not turn informality into something good.

My previous question was ‘If there’s an informality premium on land sales (uses), why doesn’t this work in London or Berlin or New York? Or does it?’

Fortunately, Chris and others misunderstood me (…) and unfolded a very interesting narrative on ‘beds in sheds’ and plotlands. What I had meant, however, was this: If informality yields a premium or is more efficient than formal property, what did Western countries/cities do for the past 200 years? Clearly, the history of Western cities shows a strong sense of moving from the informal to the formal (and students of urban planning are told about the great fires and the hazardous open sewage typical of unplanned cities) (and only a few teach their students that fires and open sewage closely depended on the definition and distribution of property rights in urban land).

So, why don’t we see more informal housing in London or Berlin or New York? The obvious answer: Formality, after all, works better. Yet, the important add-on: ‘under certain circumstances’. I wonder what exactly is different between the informal housing that Peter, Rachelle, Chris, Paulo and others have been studying and the formal housing developments in London or Berlin or New York? What are the ‘certain circumstances’?”

See also Davy’s paper on credibility.

Chris Webster:

“Jaywick Sands (and Canvey Island on the other side of the Thames Estuary) and plotlands is the perfect way of connecting informality, illegality and regulation. I’ve always taught my students that these early 20th century English developments are examples of urbanisation in advance of infrastructure, which characterises trailer homes in the USA and informal suburbs in low income countries. They are remnants of a period before regulations required infrastructure to be put in first (…).

The Thames Estuary on both sides – Kent and Essex – was littered with such developments before WW2. (…) The same economic logic applies within cities: where ambiguous or absent property rights allow (…), people will colonise space without, or prior to, infrastructure to support residential use. HK’s caged subdivisions (200,000 of them) are a modern example in a wealthy world city.”

Chris Webster:

“In China we are estimating the informality (negative) house price premium (i.e. Discount). So our hypothesis is that people bid a lower land premium for less complete property rights. We have also looked at the question of whether incomplete property rights is less or more efficient than more complete property rights. One of my HKU colleagues has a paper published showing that although people live much more densely in urban villages in China than in formally developed land in a similar location, the aggregate land value in urban villages is lower. This implies that informality is LESS efficient. The question is an empirical one, not a theoretical one.

I suspect that with HK’s cage homes (people bed-sharing at 1 person per square meter), informality might be economically more efficient than the formal equivalent. This is because there is less scope than in Mainland Chinese cities to create value by design. In that circumstance, more people is always better (in terms of raw economic efficiency defined in terms of $ rent/meter square). This is not a comment on the desirability, morality or social efficiency or allowing people to live in such squalid conditions.”

Paolo Silva:

“What we really found interesting (…) in our research was to see that informality itself could work as a trigger, as part of a specific context in which formal institutions behave differently – expressing an unusual malleability. That suggested leading not only to short term reaction to informality but also to reflect in the long-term on the role of formal institutions towards formality and informality.”

Peter Ho:

“The question of morality and desirability is a critical one, yet, the Credibility Thesis leaves it aside (in perhaps a similar vein as Chris suggested), to zoom in on what institutions mean for actors. Within the credibility paradigm, that meaning – or function, if you wish – is comprehensively construed, thus, does not stop at economic efficiency, but includes other dimensions as well (e.g. social welfare, security, cultural or social cohesion, etc.).
The issue of function brings me to the excellent question [Ben] posed: ‘What is the difference between the informal housing that Rachelle, Chris, Paolo and others have been studying and the formal housing developments in London or Berlin or New York? What are the “certain circumstances”?’

In my view, the “certain circumstances” depend on the function that actors accord to institutions. This has three implications:

  1. There might be little value in labeling “Formality” as better or superior to “Informality”, or vice versa. It’s because the institutional form of Formality or Informality, for that matter, is derived from a certain institutional function as it has endogenously emerged and persists amongst a group of actors.
  2. Formality and Informality are no institutional prerogatives of a “developed North” versus a “developing South.” Thus, we should be careful to depict informality as a treat of China, Brazil and India versus formality as specific to London or Berlin or New York. In fact, I daresay that in a developed context, informality is perhaps as omnipresent as formality. In this context, I’d also like to draw attention to Marja Elsinga’s work on the importance of informality in the housing sector of Western countries.
  3. The “certain circumstances”, can most likely be measured as long as we care to delve into the credibility (i.e. functionality) of institutions. In other words, once we aim to assess (qualitatively or quantitatively) actors’ perceptions of institutions and the level of conflict they generate over time and space. Hence, the focus on “FAT” or “the Formal”, “the Actual” and the “Targeted”, and the focus on the 7 dimensions of institutional conflict.

Sadly though, that exercise – delving into the Function – rather than the Form of institutions, is oft disregarded, not in the least by decision-makers eager to demonstrate political resolve in dealing with certain socially or morally contested “hot potatoes”.

In the context of the above, see also, e.g. Celhay and Gil, 2020; Clarke, 2018; Zhang, 2018; Gomes and Hermans, 2018.