Public Service Delivery, Exclusion and Externalities

Many public services use performance incentives for providers to improve quality. We show theoretically that such incentives can have ambiguous welfare effects in settings where access is priced through user fees and fee compliance is imperfect. In such settings, higher quality raises demand, which increases expected fee revenue and induces greater collection effort—a previously overlooked channel in public service delivery. Combined with sufficiently strong cost complementarity between fee-collection and quality-improvement efforts, increased fee collection can reduce usage even when nominal fees are fixed. Reduced usage can generate negative externalities as users resort to inferior outside options. We test this mechanism using a large-scale randomized controlled trial offering a quality-improvement package among basic service providers in two large Indian cities. The treatment raises both quality and fee compliance, reducing usage and increasing reliance on an externality-generating outside option. Our findings show that quality improvements and equitable access cannot be treated as independent objectives when providers control both service delivery and fee enforcement.