Water, Spillovers and Free Riding: Provision of Local Public Goods in a Spatial Network ∗ Rossa O’Keeffe-O’Donovan January 6, 2019 Abstract When public goods are provided locally, investments may be made strategi- cally in the presence of free riding and spillover effects between neighboring communities. I estimate the costs of fragmented provision of water pumps in rural Tanzania by structurally estimating a spatial network model of decen- tralized pump maintenance decisions. I identify strategic interactions by using exogenous variation in the similarity of pumps as a shifter in the strength of spillovers that are possible between them. Estimation of the model combines maximum simulated likelihood with a clustering algorithm that partitions the data into geographic clusters and allows for multiple equilibria. The results show that free riding and pump maintenance spillovers are important factors in explaining pump functionality. I estimate that standardization to a single pump technology to increase maintenance spillovers would increase pump func- tionality rates by 6 percentage points. Water collection fees discourage free riding and would increase pump functionality rates by 11 percentage points if adopted universally. Keywords: local public goods, spatial network, water, spillovers, free rider problem. JEL Classification: H41, L14, O13 ∗Nuffield College and Department of Economics, University of Oxford. I would like to thank Camilo Garc´ıa-Jimeno, Petra Todd and Jere Behrman for invaluable advice throughout this project. I am also grateful for comments and feedback from Juan Pablo Atal, Andrew Crane-Droesch, Han- ming Fang, James Fenske, Andrew Foster, Felipe Gonzalez, Simon Franklin, Fernanda M´arquez- Padilla, Bob Miller, Sarah Moshary, Simon Quinn, Andrew Shephard, Holger Sieg, Rakesh Vohra, Jeff Weaver and participants at the Y-Rise networks and spillovers conference. I thank Brian Banks at GETF and Joseph Pearce at IRC for help with data collection, survey participants and other water practitioners who have given valuable feedback throughout this project. 1 1 Introduction Decentralized provision of local public goods can be strategic. If agents free ride on public goods in nearby communities, or if there are spillovers in the costs of providing them, provision of a local public good in one area can affect the incentives to invest in a similar public good in a nearby area. This is particularly relevant in developing countries, where non-governmental organizations often provide public goods alongside local and national governments. I analyze fragmented provision of water in rural Tan- zania, where more than 500 organizations have installed hand-powered water pumps and where communities make decentralized pump maintenance decisions. I show that a lack of coordination between organizations installing water sources, combined with strategic pump maintenance decisions of communities, is costly: it decreases the functionality rate of pumps and lowers rates of child survival and school attendance. I develop and structurally estimate a spatial network model to explain the equilibrium pump maintenance decisions made by rural communities in Tanzania in the presence of spillovers and free riding between nearby communities, given the installation deci- sions made by water practitioners.1 I use tools from network economics and industrial organization to contribute towards a better understanding of what determines pump functionality. This paper also includes methodological innovations: first by using a novel empirical strategy to identify network effects, and second by using a clustering algorithm to help overcome multiplicity in the estimation of a network game with binary action space. Distinguishing social interactions from correlated effects is a major challenge in esti- mating network models (Manski [1993], Brock and Durlauf [2001], Brock and Durlauf [2007], Bramoull´e et al. [2009], De Giorgi et al. [2010]).2 My identification strategy is motivated by two key facts: pumps are more likely to be functional if there are more pumps of the same technology nearby, but are less likely to be functional if there are more non-pump water sources nearby. These spatial correlations in pump functionality may be driven by either strategic interactions in pump maintenance 1I make a conceptual distinction between free riding and spillover effects. In this context, indi- viduals can typically access nearby water sources at the same terms as the community maintaining them, allowing them to free ride on that community's pump maintenance expenditure. Spillover effects occur when the maintenance of one pump affects the costs of maintaining a similar nearby pump. 2See Blume et al. [2010] or de Paula [2016] for a recent review of this literature. 2 or spatially correlated shocks or unobserved variables. However, spatially correlated shocks must be technology-specific to explain these two motivating facts, for exam- ple if local physical conditions affect both the technology of pump installed and the probability that it is functional, and I do not find quantitative or qualitative evidence to support such mechanisms. The evidence instead points towards a second explana- tion, that there are two counter-acting social interactions occurring: free riding and positive spillovers in the maintenance of pumps. When there are many pumps of the same technology nearby, the positive spillover effects are larger, and pumps are more likely to work. However, maintenance spillovers are small when a pump is close to many non-pump water sources, the free riding effect dominates and the pump is less likely to be functional. To identify spillover effects in the cost of pump maintenance, I assume that the strength of spillovers between neighboring communities depends on exogenous vari- ation in whether they have the same technology of pump, but spatially correlated shocks (e.g. weather) are independent of technology. Evidence from reduced form analysis and a survey of water sector experts in Tanzania and other developing coun- tries supports this assumption. To identify free riding in the maintenance of pumps, I use variation in the availability of community taps, which are typically managed by a centralized authority rather than a rural community, because of their higher costs.3 I estimate a structural spatial network model to allow me to disentangle the counter- acting free riding and spillover effects, to test the mechanisms that they work through and to estimate the equilibrium effects of proposed policy changes.4 In the model, decentralized communities decide whether to maintain their pumps, given the actions of their neighbors and the existing network of installed water sources. The model incorporates free riding by allowing a community to use a neighbor's water source if their own pump is non-functional, with the cost of access depending on the distance they must travel and the characteristics of the alternative water source. Spillovers occur through a community's cost of maintaining its pump, which depends on the maintenance decisions of its neighbors: for each neighbor that maintains its water 3There are two main types of improved water source in Tanzania: hand-powered pumps which draw groundwater, and taps (`community standpipes') which typically use a gravity-fed supply of surface water from an upland river or spring, transported to the community by pipes. 4Reduced form analysis can only estimate the net effect of spillover and free riding effects of nearby water sources, and cannot evaluate the equilibrium effects of counterfactual policies. 3 source, the cost of maintenance decreases, and this discount is larger for closer, more similar water sources. These maintenance spillovers may occur through a number of mechanisms, including the creation of markets for spare parts, skill development, or sharing of maintenance costs and information. Health and education outcomes depend on communities' maintenance decisions, which allows me to estimate the effects of pump functionality on child survival and school attendance rates. I estimate the model using new geo-coded administrative data from Tanzania, which contains rich information on all public rural water points in the country. I supple- ment this data with information from the National Panel Survey (2007-2008), the Population and Housing Census (2002, 2012), groundwater variables from the British Geological Survey (2012) and a survey of 32 water sector experts that I conducted to inform my modeling decisions and help understand the mechanisms driving the results. Estimation of a network game with binary action space is challenging, be- cause community choices are not independent of each other, and because multiple equilibria are possible. To address these challenges, I use a clustering algorithm to partition the water sources into geographic clusters, and assume that each cluster plays an independent game. In each cluster, I calculate the probability that each action profile is an equilibrium, and estimate the likelihood of the observed action profile by using a probabilistic equilibrium selection rule.5 I estimate the model by maximum simulated likelihood. The results indicate that free riding and pump maintenance spillovers are important factors in explaining variation in pump functionality. In particular, positive spillovers are stronger between nearby communities with pumps of the same technology, and I estimate that standardization of pumps to a single technology would increase the pump functionality rate by 6 percentage points.