The value of discretion: Price-caps and public service delivery

It is often argued that price-caps on monopolistic suppliers are necessary to redistribute surplus and make services affordable. I explore whether price-caps lead to welfare improvements through a field experiment with extension agents in Tanzania. Imposing price-caps has three effects. First, conditional on being served, the treatment reduces average prices by 17%. Second, the intervention increases the share of previously unserved customers in the beneficiary pool by 15%. Third, the price-cap reduces the geographic coverage of services by decreasing the likelihood that agents will serve remote villages by 25%. This suggests that price-cap regulation creates a tension between making services affordable and providing incentives for agents to serve remote recipients. I show that the marginal welfare effect of reducing discretion over prices can be expressed as a function of two sufficient statistics. Calculating the welfare effects shows that any reduction of agents' discretion reduces social welfare.