Informal settlements are an integral part of the urban landscape in developing countries.
These settlements are widely distributed within cities, including central business centers
and peripheral areas with environment hazards. In most cases, residents of these
settlements do not have access to basic public services and amenities. In this paper, we
examine the impact of interventions, such as upgrading basic services and resettlement
policies, on the welfare of residents of these informal settlements, who are typically the
urban poor. To examine these interventions, we estimate models of residential location
choice and allow households to be sensitive to commuting costs to work, demand for
public services, and preferences for community composition. Our empirical analysis is
based on recently collected survey data from Pune, India, and shows that poor households
prefer to live close to work and in communities that consist of people sharing common
socio-demographic characteristics. From the perspective of households living in informal
settlements, upgrading settlements in situ is welfare enhancing. If a household must be
relocated, it greatly prefers to be moved to a community that resembles its current
community.