A Weakest Link Theory of Decentralized Government Investment

Abstract

Governments face trade-offs in investing in many different inputs to markets in an effort to make them function more smoothly, and often these inputs are managed by bureaucrats with their own priorities. Many of these markets are acutely dependent on all elements of the system functioning well in order to reach a reasonably high level of equilibrium provision (education, public works, infrastructure, etc). In sanitation markets in particular, failure at any level of the supply chain creates downstream effects. In addition, local demand depends on enforcement, education, and spatial correlation. We provide a weakest link theory of agent choices for sanitation markets that demonstrates the difficulties of decentralized decision making and suggests key implications for policy implementation. The theory demonstrates that while the welfare implications of improvements in overall sanitation are substantial, incremental changes in one area may have little to no impact on overall sanitation provision. Our model provides context for thinking about lessons the sanitation literature provides in terms of policy and investment.