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Abstract
Questions relating to the allocation and management of risk have played a central role in the
development of the National Water Initiative, particularly as it has applied to the Murray-
Darling Basin. The central issues of efficiency and equity in allocations are best understood by
considering water licenses as bundles of state-contingent claims. The interaction of property
rights and uncertainty regarding water flows, production and output prices is modelled using a
state-contingent representation of production under uncertainty. The role of technology and
investment in the determination of efficient adaptation strategies to manage risks is explored
using an illustrative example.