Gautam, S; (2017) Household Demand in the Presence of Externalities: Model and Applications. Doctoral thesis , UCL (University College London).

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Abstract

This thesis consists of three chapters on the empirical analysis of demand for a preventive healthcare good in a context where externality or spillover effects are relevant. The application in all three chapters focuses on household adoption of sanitation in the developing world and uses a unique dataset on sanitation take-up from rural India. Research in public health has shown sanitation adoption to generate significant positive externalities that affect health, economic and social ‘well-being’ of individuals. Failure to internalize such public benefits generates a divergence in the social and private value from sanitation leading to sub-optimal adoption. In Chapter 2, I formulate a simple static model with interdependent adoption decisions to analyse the impact of externalities on household demand for sanitation. I estimate the model and propose an extension to the Hotz & Miller two-stage estimator to account for limitations of using sample survey data with strategic interaction models. Chapter 3 quantifies the subsequent welfare effects generated by policy interventions in the presence of spillover effects. I extend earlier work by Dagsvik & Karlstrom (2005) for welfare analysis under discrete choice to strategic interaction models, so as to decompose the impact of a subsidy intervention into its direct and indirect effects. I find that between 41%-86% effect of a subsidy is propagated through the externality channel. Positive externality effects also imply a welfare gain and an increase in a household's willingness-to-pay for a policy that subsidises sanitation. Chapter 4 analyses the extent of under-adoption of sanitation and the appropriate choice of policy between sanitation loans and price subsidies to increase sanitation coverage. I formulate a dynamic equilibrium model of household sanitation demand to investigate the role of two distinct sources of market failures: liquidity constraints and externalities, which both lead to under-adoption. I find price subsidies to be more cost effective at increasing sanitation coverage. But the policy effects are heterogeneous with coverage levels, where loans are found to be equally, if not marginally more, effective in villages with no sanitation coverage.

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