DP18636 Public Service Delivery, Exclusion and Externalities
When public services are funded through user fees, incentivizing providers to improve quality while holding nominal fees constant can have ambiguous welfare effects. We identify a novel channel, both theoretically and empirically, where incentives to enhance quality also intensify payment enforcement, leading to user exclusion. Using a randomized controlled trial in the context of water and sanitation services in the slums of two large Indian cities, we find that service quality and fee compliance improve as providers increase efforts in both maintenance and monitoring. However, heightened monitoring excludes users, generating negative externalities. These findings underscore the need for financing models that better align provider incentives with equitable access.
