UCL Department of Economics


Job Market Paper

Household (Under) Adoption of Sanitation: Externalities and Borrowing Constraints


This paper analyses under-adoption of sanitation and the effectiveness of loans and price subsidy policies to increase coverage in the developing world. Under-adoption may be the result of externalities and borrowing constraints: while sanitation is an expensive investment for many poor potentially liquidity constrained households, it also generates positive health externalities. To investigate the impact of the two policies on sanitation coverage I estimate a dynamic model of household demand on a unique dataset from rural India. The model embeds both sources of market failure in order to compute equilibrium adoption levels under the loan and the subsidy policy. Using simulations from the estimated model, I study optimal policy design in an equilibrium setting with potential multiple equilibria. Counterfactual analysis reveals that existing sanitation levels are on average 53% below the social optimum, implying under-adoption. I find price subsidies to be more cost effective at increasing sanitation coverage. However, the policy impacts are heterogeneous by coverage levels: in villages with low coverage loans are equally, if not marginally more, effective. A price subsidy has a high social rate of return where externalities account for a substantial fraction of the policy impact. While a sanitation loan policy generates smaller social returns is found to be cost efficient under targeted delivery.