the value of legal housing titles: an empirical study

JOURNAL OF

Journal of Housing Economics 15 (2006) 143–155

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HOUSINGECONOMICS

The value of legal housing titles: Anempirical study q

Fabio Mendez *

Department of Economics, Business Building Room 402, University of Arkansas, Fayetteville, AR 72701, USA

Received 3 November 2005Available online 4 October 2006

Abstract

This paper estimates the value of legal housing titles using a Costa Rican urban housing surveyconducted in 1997. The general results obtained regarding the value of legal titles to the average indi-vidual are consistent with past estimations found in the literature, but the implications for policy arenew; as some groups are shown to value legal titles more than others. The criterion used to createthese groups was inspired by the theoretical guidelines provided by past literature and could be easilyreproduced by policy makers who may wish to target these types of individuals.� 2006 Elsevier Inc. All rights reserved.

JEL Classification: O170; O180; P14; R310

Keywords: Property rights; Legal titles; Housing

1. Introduction

Policy questions regarding legal housing titles are most relevant for developing econo-mies throughout the world where institutions are still in formation and the difficulties

1051-1377/$ - see front matter � 2006 Elsevier Inc. All rights reserved.

doi:10.1016/j.jhe.2006.08.002

q I wish to thank the Inter-American Development Bank (IADB) for providing the survey data necessary forthis study. All results and implications of this paper are solely my responsibility and are not linked in any mannerto the IADB. I also wish to thank Paul Strassmann and two anonymous referees for their useful suggestions andRafael Medaglia for his help with legal consultations. All errors are mine.

* Fax: +1 479 5753241.E-mail address: [email protected]

mailto:[email protected]

144 F. Mendez / Journal of Housing Economics 15 (2006) 143–155

faced by government programs dealing with informal urban settlements abound. Part ofthe problem, at least, is that government officials lack information about the value of for-mal property rights, about the individual’s willingness to obtain (and pay for) a formaltitle and about the mechanisms that could be used to better target their policies.

Empirically, the value of legality in a housing title cannot be observed directly becauseit is part of the overall sales price of any structure. There is no separate market price forlegal titles. Instead, the value of a legal title can be imputed indirectly by estimating theextra value of a property that is secured by a legal title with respect to another one that(ceteris paribus) is not.

Authors like Jimenez (1984); Friedman et al. (1988); and Lanjouw and Levi (2002),have estimated the value of legal property titles in such a manner. Their results haveprovided consistent and convincing evidence that legal housing titles add positive valueto the house. Their estimates for the value of legal property titles range between 25% and58% of the total value of the average house.1 As this paper suggests, however, theirestimations might not be sufficient for the accurate targeting and design of policyprescriptions.

The basic econometric framework for estimating the value of a legal housing title oftenrelies on a hedonic regression in which the value of the House (H) is determined by a vec-tor of house characteristics (~C) and a dummy variable that describes the legality of the title(T). Then, the estimated coefficients are used to asses the value of a legal title for the aver-age individual in terms of its contribution to the total value of the house.

The problem with these estimates is that policy makers do not target their policies to theaverage individual but to families that have different characteristics and that value legaltitles differently for specific reasons. Thus, while previous findings regarding the estimatedvalue of legal housing titles are true on average, they still might not provide the best guidefor policy.

Individual valuations of legal titles depart from average valuations because the specificneeds for legal titles and the specific uses given to these titles vary across households. This‘‘noise’’ is then reflected in their valuation of the house, as owners incorporate the value ofthe title into the total valuation of the house. Thus, as long as one uses ‘‘self-assessed’’ esti-mations for the value of the house, one should be able to observe these differences and testfor specific targeting strategies.

In this respect, the theoretical literature has provided clear guidelines regarding thechannels through which individual households can benefit from having a legal title: First,legal titles decrease the probability of eviction and the private costs of securing the prop-erty significantly. Second, legal titles increase the transaction value of the property as thenumber of potential buyers increases and the transaction costs diminish. Third, legal titlesallow households to generate new capital investments, as they provide collateral in creditoperations and security for risk-sensitive investors.

What is still to be understood in more detail is the relative importance of these threechannels. What types of gains actually take place and who is more likely to obtain the ben-efits? Also, can the theoretical insights at hand be used to identify those individuals whobenefit most from legal titles? How much would they be willing to pay for it?

1 Other studies show even greater estimates. Alston et al. (1996), for example, report the value of legal titles toaccount for as much as 189% of the total value of the land.

F. Mendez / Journal of Housing Economics 15 (2006) 143–155 145

This paper addresses these questions. It estimates the value of legal property titles onthe Costa Rican urban housing market using hedonic regressions on the value of the houseand then studies specific segments of the population that vary in their economic activitiesand incentives as related to legal housing titles. The general results obtained regarding thevalue of legal titles to the average individual are consistent with past estimations found inthe literature, but the implications for policy are new; as some groups are shown to valuelegal titles more than others.

Specifically, individual households are selected on the basis of observable characteristicsat the time of the survey. Those who are more likely to experience ‘‘eviction-related’’, ‘‘in-vestment-related’’ and ‘‘transaction-related’’ gains from legal titles are identified andgrouped together into a ‘‘high-value’’ sub-sample of the population. For this sub-sample,the estimated value of legal titles more than doubles that one for the rest of the sample andis approximately 40% greater than the estimated value for the total population. The resultsare robust to using instrumental variables techniques that control for potential endogene-ity problems and are not altered by the inclusion of many other control variables.

This type of evidence about the value of legal titles to specific groups of individualscould be used for the design and targeting of housing policies in many countries. Otherstudies that failed to account for the different mechanisms through which legal titles ben-efit individuals could lead policy makers to underestimate the value of legal titles for somegroups of the population and to overestimate it for others. Furthermore, informationregarding the sources of the benefits created can be useful in the design of alternative insti-tutions that complement or substitute property rights (where these cannot be developed).

Other related studies, like Alston et al. (1996); Feder and Feeny (1991); and Besley(1995), have concentrated on the value of legal titles in distant or rural land. In contrast,the data set used in this paper is exclusive to an urbanized area. Moreover, the sample sizeused in this paper is much greater than that of the typical study.

The remainder of the paper is organized as follows: The next section describes the dataset and the econometric specifications used in the paper. Section 3 shows the empiricalresults and, finally, Section 4 concludes and provides possible directions for futureresearch.

2. Data description and econometric specifications

The data used in the empirical study comes from a housing survey conducted by theInter-American Development Bank (IADB) during 1997 in the Costa Rican Metropolitanarea. This is an urban area composed of four main provinces: San Jose (SJ), Alajuela (AL),Heredia (HE) and Cartago (CA). The survey provides the province, the district (cantones)and the sub-district in which the interviewed household was located. To give an idea, theaverage sub-district of the capital and the most populated SJ extends about 4 sq km.2

The survey contains information on 2000 randomly selected households. Of the totalnumber of households, 317 rented their house and 168 borrowed (or shared) their housefrom (or with) friends and family; these households were excluded from the sample sincethey could not provide any information regarding the legality of the property. Thus, the

2 Information provided by the Costa Rican National Institute of Census and Statistics.


empirical study concentrates on the 1515 households that own the house in which they liveand can provide the details of the ownership, regardless of whether they have a legal title.

The main econometric specification used to estimate the value of a legal title as part ofthe total value of the house is represented by the following equation:

H ¼ aþ b � ~C þ h � T þ e ð1ÞWhere H represents the value of the house, (~C) represents a vector of house-specific char-acteristics, T is a dummy variable taking the value of one when the home owner possessesa legal title and the value of zero otherwise; and e is the error term. The data appendixprovides a complete list of definitions and descriptions for all variables used in the econo-metric analysis.

For the property value (H), the empirical study uses the self-assessed estimation of theowner. The specific question asked to the owner was ‘‘How much do you think you couldsell your house for?’’ Thus, the answer to this question reveals the owner’s perceptionabout the value of his house and not the value at which it was sold. All regressions in thispaper use the logarithm of the self-assessed house value as the dependent variable; thischoice makes it easier to compare the results against those of other papers in the literaturethat have adopted the semi-logarithmic specification as the standard.

On average, self-assessed estimations have been shown to be consistent with actual salesprices or with independent estimates obtained from professional appraisers [see Jimenez(1982); Kain and Quigley (1972)]. Furthermore, the error in self-assessed estimations doesnot seem to be correlated with characteristics of the house or the owner (Goodman andIttner, 1992); thus, making the use of self-assessed measures as estimates of house valuein econometric applications less worrying.3 At the individual level, however, the two fig-ures can differ significantly. Jimenez (1982), for example, reports the average absolute val-ue of the difference between owner and appraiser valuations to be ‘‘over 55% of the meanappraised value.’’ Kain and Quigley (1972) have also reported similar results for the caseof the United States.

For the dummy variable representing the legal title (T), throughout this study an ownerof a property is considered to have a legal title only when his ownership is permanentlyregistered and recognized by the government (in accordance to public registry records).The information regarding whether a house is legally titled is also self-reported; that is,the owner was asked to reveal what documents (if any) assured his claim to that property.

Most housing units in the surveyed area have legal titles, but units without legal titlesalso exist. Approximately 16% of all units do not have a legal title. Houses without a legaltitle fall in several categories: The first category is composed of those households who donot have a legal title but to whom the law has granted temporary rights on the groundsthat the property is not registered under anyone else’s name. These households can obtaina legal title as long as they can show they have ‘‘publicly, passively and continuously pos-sessed a non-registered lot for 10 years or more’’ (Medaglia, 2005).

The rights of ownership granted by these laws are nonetheless subject to a public trialthat ultimately determines the permanent property rights. The trial usually lasts betweensix to twelve months. For these households, the cost of obtaining a legal title amounts to

3 In a related paper, Lanjouw and Levi (2002) write that even though perception questions raise concerns aboutthe ‘‘noise and potential biases’’ they may entail; ‘‘whatever noise there may be in these data, it is not sufficient todisguise many interesting and statistically significant relationships.’’


the fees associated with the registration and publication of the title and the costs of legalrepresentation.

The second category is composed of those households who have illegally invadedpublic or private land and attempt to claim that land as their own. There is no legalway for these individuals to obtain a legal title. In the past, however, some of thesehouseholds have successfully called for the central government’s mediation and havesubsequently obtained legal titles. In those instances, the government buys the land fromits owner and grants the title to the former invaders; or simply grants it if the land ispublic.

Finally, the third category is composed of those households who illegally subdivided aresidential lot into two or more unregistered lots or who have secured a transactionthrough private contracts but without registering the transaction in the public registry.In this last case, the buyer acquires the property from the seller, but is not able to showhis ownership to a third party. Typical examples of this category include transactionsbetween friends or family who trust each other and do not anticipate the need for formalproperty registration. A local legal firm that was consulted recognized the existence andfrequency of such contracts and attributed their existence to ‘‘ignorance and old customs’’on the buyer’s part (Medaglia, 2005).

The land owners in this last category can obtain a legal title as long as the property theyseek to register meets all requirements stated by law (in the case of a subdivision of a largerlot) and the validity of the private contract with which the property was acquired is cer-tified by a judicial court (regardless of whether the contract is disputed or not). Thus,the costs of obtaining a title in these cases are primarily legal costs and the costs of litiga-tion, which can range between 1.5 and 5% of the value of the property, depending on thetype of lawyer that is hired.

In turn, the vector (~C) of house characteristics is composed by a series of variables mea-suring different aspects of the property. These variables include: lot size, house size (con-structed area), number of rooms, bathrooms, living rooms, and garages, distance to citycenter, three dummy variables describing the type of sewerage system used, three dummyvariables describing the materials of the walls, and six dummy variables describing thematerials of the floor. Additionally, in order to control for location and neighborhood sta-tus, a variable indicating the average value of a house in that neighborhood and threedummy variables controlling for location in either one of the major metropolitan areasoutside of San Jose were also included. The sub-district averages were used to approximatethe otherwise undetermined limits of a neighborhood.

When Eq. (1) is estimated the coefficient for h is interpreted as the implicit value of thelegal housing title. The simple OLS estimation, however, could suffer from a simultaneitybias, as those owners of more expensive houses have a greater incentive to obtain a legaltitle. Thus, in order to address endogeneity concerns of this sort, Eq. (1) is also estimatedusing instrumental variables (I.V.).

Two variables were used as instruments: the proportion of houses in the neighborhoodthat have a title and a dummy variable indicating whether the household head was bornoutside Costa Rica. Both of these instruments are highly correlated to the Title variable,but are not correlated with the value of the house after controlling for other house char-acteristics. Statistically, foreign immigrants are less likely to hold a title and houses locatedin neighborhoods with a lower proportion of titled houses are less likely to hold a title aswell. Intuitive arguments explaining such correlations can be presented. On the one hand,


foreign immigrants have less knowledge of the institutions and are typically less educated;thus, they are less likely to demand a title. On the other hand, if some locations were pre-ferred by owners of non-titled houses, then one would expect non-titled houses to be closeto each other.

Former studies by Lanjouw and Levi (2002); Friedman et al. (1988) and Miceli et al.(2001) suggest the use of similar household and neighborhood characteristics as potentialinstruments. In this study, other variables like marital status, the number of adult males inthe household, the age of the household head, and others were also considered initially,but they all showed to be correlated with value of the house and could not be used asinstruments.

2.1. Groups of interest

As mentioned in the introduction, this paper is concerned with finding specific sub-groups of the population who, due to their particular characteristics, may value legal titlesdifferently than the average household. In this respect, the existing literature [see, forexample, Demsetz (1967); North (1990); Besley (1995) and De Soto (2000)] has consistent-ly identified three distinct types of gains from which the individual who holds a legal prop-erty title could potentially benefit:

• Eviction-related gains: legal titles provide increased security of tenure as they decreasethe probability of eviction and decrease the private costs of securing the asset.

• Investment-related gains: legal titles allow the owner to generate new capital as theyprovide collateral in credit operations and security for risk-sensitive investors.

• Transaction-related gains: legal titles increase the exchange value of the house byexpanding the market and decreasing the transaction costs associated with a sale.

As one incorporates these different types of gains into the analysis, the possibility thatindividuals value legal titles differently becomes apparent. Thus, for example, the per-ceived value of a legal title (and the composition of its value) for an individual with sev-eral investment projects, without any eviction concerns, and who changes domicilefrequently would be different from the perceived value for an individual who has noactual or potential investments, has never held a legal title and plans to live all his lifein the same house.

Following this logic, the three distinct sources of value mentioned before are used toclassify the population into two big groups: The high-value group is composed by individ-uals who are more likely to experience ‘‘eviction-related,’’ ‘‘investment-related’’ or ‘‘trans-action-related’’ gains. The low-value group is composed by all individuals not included inthe high-value group.

Specifically, individuals are included into the high-value group because of ‘‘eviction-related’’ experiences when they met either of two characteristics: One, if they had suf-fered an eviction from their previous home. Two, if the house they owned before movinginto their present home had not been secured by a legal title and, therefore, they hadbeen exposed to a probable eviction. Similarly, households that had invested in theirown house in the last 3 years either by expanding or repairing the unit, or had any addi-tional assets in the form of commercial land or real state property beyond his living unitwere included into the high-value group because of ‘‘investment-related’’ experiences.


Although this may seem like a very limited measure of investment activity, it accountsfor most of the investment reported in the survey. Finally, households who reported aninterest to sell their current house or that had actually gone through the sale processwith their previous unit were included into the high-value group because of ‘‘transac-tion-related’’ experiences.

Table 1 shows how the total population is disaggregated into the low-value and high-value groups, as well as the composition of the latter. Almost two thirds of the householdsin the sample belong to the high-value group. Within the high-value group, approximately55% of the households had investment-related experiences, 33% had eviction-related expe-riences, and 34% had transaction-related experiences. Households with more than onetype of such experiences (investment, transaction or eviction) amount to 22% of thehigh-value group; but only 13 out of 947 households in the high-value sample had all threetypes of experiences.

If the intuition behind the theoretical arguments is correct and the value of legal titlesemerges from the specific functions it can accomplish, then one would expect legal titles tobe more valuable for those individuals who actually use the title for these purposes. Thatis, one would expect those individuals in the high-value sample to value legal titles morethan the rest of the population.

Before testing this proposition empirically, however, the characteristics of the house-holds that form the high-value and low-value groups need to be discussed. For this pur-pose, Table 2 presents a summarized description of several household characteristicsacross groups. As shown in Table 2, households in the high-value and low-value groupsare fairly similar in terms of income, education, size, age, and general composition. Forall descriptive statistics presented in Table 2, the difference across groups is not statisticallydifferent than 0 at reasonable levels of significance. Thus, apart from the criteria used todivide the households in two sub-groups, there are no obvious differences across thetwo samples that could bias the results.

Beyond the study of the two major sub-samples, the study of the smaller categorieswithin the high-value sub-sample (those with eviction, investment and transaction relatedexperiences) is also important because it allows one to examine the empirical validity ofeach theoretical argument separately. Furthermore, since each category represents fairlydifferent sectors of the population, the individual results pertaining to each category mightbe of particular interest for policy makers.

Table 1Groups of interest

N % with legal title (%)

(1) With eviction-related experience 312(2) With investment-related experienced 521(3) With transaction-related experienced 327(4) With more than one type of experience 200(5) With all three types of experiences 13(6) High-value group (1 + 2 + 3 � 4 � 5) 947 84.05(7) Low-value group 568 89.61

Total sample (6 + 7) 1515 86.10

Table 2Household characteristics

High-value group Low-value group

Household characteristics

Avg. monthly household income 155,205 130,006Avg. age of head of household 48.4 51.4Avg. household size 4.15 4.10Avg. head of household years of education 8.23 7.88Avg. spouse’s years of education 6.07 5.30Avg. number of children 1.37 1.26Avg. number of people aged 60 or more 0.47 0.54Avg. number of females 2.4 2.06Avg. number of males 2.1 2.00Proportion of married households 0.71 0.65Proportion of migrant households 0.18 0.14


3. Empirical results

Table 3 presents a descriptive summary of the main characteristics of both the housingunit and the household that occupies that unit with or without a legal title. As could beexpected, richer, older and more educated households tend to live in more spacious, expen-sive and convenient houses. They are also more likely to hold a title. The implication fromTable 3 is that a legal title is a desirable feature for a house owner; one that is likely deter-mined by individual choices and that, therefore, can be affected by economic policies

Tables 4–6 present the results of estimating the hedonic regression in Eq. (1) using bothO.L.S and I.V techniques. As shown, the estimated coefficients of variables that capture

Table 3General descriptive statistics

With legal title Without legal title

Property characteristics

Avg. number of bedrooms 3.01 2.31Avg. number of bathrooms 1.24 0.95Avg. estimated sale value 7,178,920 2,518,929Avg. lot size (m2) 230 125Avg. constructed area (m2) 134 85Avg. distance to market (min) 19.78 24.30Neighborhood’s avg. house value 6,576,465 4,354,373Avg. number of years at present location 26.84 11.00

Household characteristics

Avg. monthly household income 156,133 78,837Avg. age of head of household 50.5 43.67Avg. household size 4.07 4.51Avg. head of household years of education 8.47 5.8Avg. spouse’s years of education 5.98 4.54Avg. number of children 1.22 2.00Proportion of married households 0.70 0.58Proportion of migrant households 0.14 0.33

Table 4Hedonic regressions

O.L.S. Estimation* I.V. estimation*

Title 0.53 (8.10) 0.61 (3.21)Lot size 0.0003 (4.18) 0.0003 (4.11)Constructed area 0.0007 (4.26) 0.0007 (4.22)Bedrooms 0.12 (5.27) 0.119 (5.08)Living rooms 0.013 (0.31) 0.011 (0.28)Bathrooms 0.13 (3.16) 0.14 (3.18)Garages 0.10 (2.34) 0.10 (2.27)Distance to center �0.005 (�2.28) �0.005 (�2.22)Neighborhood value 6.53 e�8 (8.31) 8.2 e�8 (7.85)AL �0.11 (�1.76) �0.11 (�1.81)HE �0.074 (�1.18) �0.078 (�1.24)CA 0.0013 (0.02) �0.007 (�0.11)R2 0.46 0.46

Dependent variable: self-assessed house value. Other control variables included three dummy variables describingthe type of sewerage system used, three dummy variables describing the materials of the walls, and six dummyvariables describing the materials of the floor.

* T-statistics in parenthesis.


O.L.S. Estimation*

Low-value group High-value group Eviction Transaction Investment

Title 0.33 (3.06) 0.58 (6.93) 0.63 (5.54) 0.46 (2.8) 0.61 (4.74)Lot size 0.0007 (4.45) 0.0002 (2.89) �0.0002 (�0.62) 0.0006 (1.5) 0.0002 (2.91)Constructed

area6.52 e�6 (0.02) 0.0009 (4.19) 0.001 (1.34) 0.0006 (0.93) 0.0008 (3.24)

Bedrooms 0.108 (3.19) 0.109 (3.54) 0.061 (0.96) 0.21 (3.9) 0.09 (2.49)Living rooms �0.006 (�0.09) 0.005 (0.10) 0.08 (0.73) 0.093 (1.09) �0.03 (�0.48)Bathrooms 0.11 (1.51) 0.15 (2.73) 0.27 (2.03) 0.097 (1.09) 0.13 (1.93)Garages 0.067 (0.99) 0.12 (2.04) 0.08 (0.58) 0.09 (0.86) 0.2 (2.53)Distance to

center�0.005 (�1.44) �0.006 (�2.15) �0.006 (�1.16) �0.003 (�0.57) �0.006 (�1.49)

Neighborhoodvalue

7.55 e�8 (6.44) 5.91 e�8 (5.63) 4.55 e�8 (2.46) 7.45 e�8 (3.58) 6.84 e�8 (5.05)

AL �0.04 (�0.44) �0.17 (�2.13) �0.23 (�1.71) �0.17 (�1.18) �0.23 (�1.99)HE 0.01 (0.1) �0.11 (�1.45) 0.07 (0.52) �0.16 (�1.28) �0.07 (�0.7)CA �0.15 (�1.54) 0.09 (1.01) 0.29 (1.85) 0.20 (1.37) 0.02 (0.16)R2 0.45 0.49 0.57 0.55 0.45




the characteristics of the house have the expected sign and are statistically significant forthe most part. Houses with more space, more land, more rooms, a garage, faster access toeconomic markets, located in more expensive neighborhoods, and in more populatedstates are valued higher than others.


I.V. estimation*

Low-valuegroup

High-valuegroup

Eviction Transaction Investment

Title 0.33 (0.96) 0.68 (2.9) 0.66 (2.21) 0.85 (1.48) 0.87 (2.49)Lot size 0.0007 (4.34) 0.0002 (2.83) �0.0002 (�0.63) 0.0006 (1.49) 0.0002 (2.83)Constructed

area6.5 e�6 (0.02) 0.0009 (4.11) 0.001 (1.31) 0.0005 (0.77) 0.0008 (3.19)

Bedrooms 0.108 (3.19) 0.104 (3.29) 0.05 (0.91) 0.21 (3.82) 0.08 (1.97)Living rooms �0.006 (�0.09) 0.005 (0.10) 0.07 (0.72) 0.091 (1.05) �0.04 (�0.56)Bathrooms 0.11 (1.50) 0.15 (2.75) 0.27 (2.03) 0.10 (1.18) 0.14 (1.97)Garages 0.067 (0.95) 0.12 (2.0) 0.08 (0.59) 0.08 (0.75) 0.2 (2.54)Distance to

center�0.005 (�1.42) �0.006 (�2.08) �0.006 (�1.16) �0.002 (�0.49) �0.005 (�1.31)

Neighborhoodvalue

7.55 e�8 (6.15) 5.76 e�8 (5.24) 4.53 e�8 (2.44) 6.7 e�8 (2.85) 6.54 e�8 (4.63)

AL �0.04 (�0.43) �0.18 (�2.17) �0.24 (�1.63) �0.2 (�1.33) �0.25 (�2.1)HE 0.01 (0.1) �0.12 (�1.52) 0.07 (0.5) �0.21 (�1.45) �0.08 (�0.82)CA �0.15 (�1.45) 0.07 (0.82) 0.28 (1.77) 0.15 (0.89) 0.005 (0.04)R2 0.45 0.49 0.57 0.54 0.45




Additional variables describing the characteristics of the house were also used in theregressions but were not included in the tables for practical reasons. The list of these vari-ables is composed of three dummy variables describing the type of sewerage system used,three dummy variables describing the materials of the walls, and six dummy variablesdescribing the materials of the floor.

For the purposes of this paper, however, most of the attention centers around the var-iable Title; which is a dummy variable taking the value of one if the owner had a legal titleand zero otherwise. In Table 4, the total population is used. For the total population, theO.L.S estimation indicates that a legal title increases the value of the house by 69%; whilein the I.V. estimation that value increases to 84%.4 The estimated coefficients were statis-tically significant at the 1% level and were not sensitive to changes in the set of controlvariables.

Noticeable, the results presented in Table 4 are very much in line with past studies. Inhis study of Philippines, for example, Jimenez (1984) reports an estimated value for thelegal title of 58% of the total house value. Similarly, Friedman et al. (1988) report thattitles can increase home values by approximately 25%. That the estimated I.V coefficientsfor the variable title are greater than the O.L.S. coefficients is somehow surprising. Asmentioned before, households that own a more valuable property have a greater incentiveto demand a title and, because of that, one would expect to observe lower estimated

4 The estimated changes in the value of the house are (e0.53�1) = 0.69 and (e0.61�1) = 0.84, respectively.


coefficients after using instrumental variables that control for that type of endogeneity.The opposite is true in Table 4.

One potential explanation for this result, similar to that suggested by Besley (1995), isthat there is a measurement error in the ‘‘legal title’’ variable. Individuals may not reportthe legality of their tenure accurately, or they may not be familiar with the legal terms.Alternatively, it is possible that the definition used here for legal title does not captureall the essential characteristics that a title must have in order to be valuable for individuals.

Tables 5 and 6 shift the attention towards the specific groups that were created. Thesetables report the estimated value of legal titles as a percentage of the total value of thehouse for both the low-value group and the high-value group. The econometric specifica-tions used in Tables 5 and 6 are directly comparable to those of Table 4. Table 5 presentsthe OLS estimations. Table 6 presents the I.V. estimations.

In Table 5, the perceived value of the title for individuals in the low value group is esti-mated to be 39% of the value of the house. This estimate is considerably lower than theone obtained before for the total sample (69%). In contrast, for the high-value groupthe value of the title increases to 78% of the total house value; that is approximately13% higher than the one presented in Table 4 for the total sample and almost double thatof the low value group. In both cases, the coefficients were statistically significant at the 1%level.

In Table 6, where the I.V. estimations are presented, the results are qualitatively similarto those of Table 5, but the difference in value is more dramatic. As shown in that table,the estimated value of the title as a percentage of the total value of the house increases toabout 97% for the high-value group. That is more than double that of the low-value groupand approximately 40% higher than the estimate for the total population. In turn, for thelow value group the magnitude of the estimated coefficient remains unchanged, but thecoefficient now becomes statistically insignificant at reasonable levels.

Since there is some overlap in the criteria used to select the high-value sample, it is use-ful to check whether the results presented this far are sensitive to the segmentation of thesample. Such a robustness check was conducted in three different ways: First, householdswith investment-related experiences were excluded from the high-value group. Next,households with transaction-related experiences were excluded from the high-value groupinstead; and, finally, households with eviction-related experiences were excluded. Theresults obtained in these regressions do not differ substantially from the ones reportedin Tables 5 and 6.

Tables 5 and 6 also show the separate regressions estimated for those individuals with‘‘eviction,’’ ‘‘transaction’’ and ‘‘investment’’ related experiences only. The O.L.S. resultsare presented in the last three columns of Tables 5 respectively. The estimated O.L.S. coef-ficients imply a value of legal titles of 87%, 58% and 84% for each respective category andthey are all significant at the 1% level. These values are all greater than the 39% obtainedfor the low-value group; thus, all individual theoretical arguments are supported by theresults in Table 5.

As shown in Table 5, however, the estimates for the value of the title in the eviction andinvestment sub-samples were greater than that for the transaction sub-sample. For the firsttwo groups, the estimated value of the title was approximately 85% of the total value of thehouse. For the transaction sub sample, however, it was only 58%. These results suggestthat legal titles generate greater value when associated with investment or eviction relatedactivities than when associated with transaction activities alone.


Noticeably, the value of the title for investors appeared to be associated with the creditconstraints experienced. The estimation was obtained also for the less credit constrainedinvestors only: those individuals who reported having provided credit to other agents orthat reported having acquired any credit from any source without any property asset beingused as collateral for the purposes of buying, constructing or improving their house. Theregression results then showed a much smaller and insignificant coefficient for the titlevalue.

In Table 6, where the I.V. estimations are presented, the results are qualitativelysimilar to those of Table 5 again. In Table 6, the estimated value of the title in theeviction and investment sub-samples was approximately 93% and 138% of the total val-ue of the house respectively. The estimated coefficients for the title variable in thetransaction category, however, become statistically insignificant for reasonable levelsof significance.

This last set of results is consistent with the findings of Alston et al. (1996). They usea two stage procedure to estimate the value of the legal title within a theoretical frame-work that models the title as an investment resource. Their reported estimated value of189% contrasts with those from other studies that generally range between 30% and60%.

4. Conclusions and future research

Understanding the value of legal titles is an important component for the developmentof well functioning institutions. While the particular data used in this study came from aCosta Rican urban housing survey, the conclusions obtained here could also be applied bypolicy makers in other developing countries. Additionally, the results obtained regardingthe value of legal titles (and the specific sources of this value) provide important feedbackfor the theoretical work in this field.

The empirical results of the paper reveal that property titles are valuable to individ-uals. The estimated value of a title was reported to represent in between 39% to 138% ofthe total value of the house, depending on the econometric specification used and thesample of the population at hand. All individual theoretical arguments regarding thesources of the value provided by legal titles received empirical support; although therewas stronger support for those arguments related to tenure security and investmentservices.

Individual valuations of legal titles depart from average valuations because the specificneeds for legal titles and the specific uses given to legal titles vary across households.Where it is possible to sell a property without a legal title, as it seems to be the case inmany undeveloped countries, the value of legality is not as important. But when invest-ment opportunities flourish and credit for investment depends crucially on the availabilityof a legal title, legality matters most.

These conclusions suggest that property rights development goes hand in hand witheconomic development, but that their value also depends on the specific rules a societyhas chosen. In particular, the conclusions regarding how the value of legal titles is gener-ated should be sensitive to changes in other institutional elements, such as the developmentof financial markets to allocate credit based on personal responsibility and not so much oncollateral, or the laws that govern the strength of personal property rights that may disal-low eviction and which vary significantly across Central America.


Appendix A. Variable definitions

Title: 1 if owner holds a legal title (according to public registry) and 0 otherwiseLot size: Reported area of the lot in squared metersConstructed area: Reported area of construction in squared metersBedrooms: Number of bedrooms in the houseLiving rooms: Number of living rooms in the houseBathrooms: Number of bathrooms in the houseGarages: Number of Garages in the houseDistance to center: Distance from the house to the city center (in minutes)Neighborhood value: Average value of all houses located in a particular sub-districtAL: 1 if the house in located in Alajuela and 0 otherwiseHE: 1 if the house in located in Heredia and 0 otherwiseCA: 1 if the house in located in Cartago and 0 otherwiseSewerage: Two dummy variables were used to account for Septic Tank use and latrine

use. Public sewerage system was left as the base group.Wall materials: Three dummy variables were used to account for concrete, wood, andzinc and others. Brick was left as the base category.Floor materials: Six dummy variables were used to account for concrete, wood, dirt,brick, ceramic tile, and carpet and others. Mosaic Tile was left as the base category

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the value of legal housing titles: an empirical study

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