There is little evidence on whether financial incentives can support community-led total sanitation (CLTS) programs to improve rural sanitation. The magnitude of sanitation externalities – benefits from a household’s investment in sanitation that accrue to other households in the community - remains an open question in developing countries. We contribute evidence on both of these issues through a cluster randomized controlled trial encompassing 160 villages in Lao PDR, where open defecation was prevalent at the start of the study. All villages were exposed to CLTS. In treatment villages, CLTS was augmented with household and/or village financial incentives. We find that both types of incentives substantially improved sanitation coverage. We use the exogenous variation in village sanitation coverage generated by the trial to estimate the size of health externalities from private sanitation. We find that the improvement in sanitation at the village level significantly reduced the probability of child growth stunting, and find no evidence of the hypothesized threshold effect in village sanitation coverage.