Modeling Endogenous Change in Water Allocation Mechanisms: A Non-Cooperative Bargaining Approach

Water allocation in river basins across the world has been historically determined through various institutional arrangements, which are generally hierarchical in nature. But institutions are generally not explicitly recognized in the literature on resources and environmental economics as they do not yield easily to modeling in the conventional framework. This paper proposes a model to assess the potential of efficiency gains possible from institutional change under hierarchical water institutions. We hypothesize two types of institutional change from status-quo; efficient water markets yielding Pareto optimal outcomes, and more interestingly, regional and intra-sectoral water trading under imperfect markets. Using Banks and Duggan (2006) model of collective decision making to model non-cooperative bargaining, we present here the general framework. The innovative model also allows for incorporating the impact of climate change, population growth, economic growth and technological change on future supply and demand, which help study the benefits of plausible institutional changes in otherwise relatively stagnant water allocation institutions. Application of the proposed hierarchical model to Upper Rio Grande basin calculates the efficiency gains possible from non-cooperative bargaining and compares it with the outcome under cooperation. The analysis can guide policy making by highlighting the gains that institutional reforms can achieve.

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 Record created 2017-04-01, last modified 2017-08-29

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