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Abstract

The purpose of this paper is to develop a water allocation and technology adoption model under the prior appropriation doctrine that recognizes informational asymmetry among water users and between water users and water authorities. We consider informational asymmetry about the agent's type, defined by a mix of land quality and knowledge. Adverse selection is found to significantly reduce the adoption of modern irrigation technology and to lead to less retirement of poor quality lands than under full information. Further investigation shows that even with asymmetric information, incentives for water trades can exist and lead to additional technology adoption with gains to all parties. Our results suggest that under asymmetric information, even a thin secondary market can improve the allocation of water resources.

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