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Abstract

Government subsidies on electricity used for pumping groundwater by agricultural irrigators has long been suspected to be an important reason for overexploitation of aquifers in Mexico. We hypothesize that institutional arrangements that exacerbate non-excludability of groundwater also matter. We develop and estimate a model that accommodates strategic interactions among agricultural irrigators operating under distortive institutional arrangements. Results suggest that institutional arrangements are more important than electricity subsidies in explaining over extraction. Results also reveal that cost sharing of electricity by farmers may cause behavioral conjectures to change from negative (closer to Bertrand conjectures) to positive (closer to collusive conjectures). A new source of externalities is identified in Mexico’s institutional context (cost-share externalities) and found to be negatively linked to strategic externalities.

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