Water management along the transboundary Santa Cruz River basin overlapping Arizona and Mexico, faces a host of physical, economic and institutional challenges. The situation is worsened by a failure of bilateral strategies to achieve an administratively feasible solution to these problems, given different layers of governance regulating water use in each country. The current study, utilizing data from the Santa Cruz Active Management Area in Arizona and the city of Nogales in Mexico, takes an integrated approach towards water management along this region, accounting for the physical, economic and institutional constraints in water management and allocation. The baseline optimization model suggests higher optimal water use and higher net benefits from water use in the residential sector on both sides of the border, while agricultural sector overall shows the lowest net returns from water use. Results from a scenario where population growth is combined with water shortages, suggest redistribution of water use within the nonagricultural sectors in each region, with a marked impact upon residential water use benefits on the Arizona side.