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Abstract

A recent trend of literature investigates how international trade compensates or accentuates the differences in countries’ endowments in water resources and whether trade regulation should be used to improve the use of water resources at the global level. In this paper, we develop a simple model establishing a positive link between the demand for irrigation water of agricultural producers and the international price of irrigated goods. Unlike previous works, that focus on the cost of water resources, we emphasize the price of traded goods as a key element of the shadow value of water used in agriculture. We test our model empirically using data on 159 irrigated crops exported by 183 countries, and find that countries’ irrigation behavior is strongly linked to the global price of crops. This indicates that agricultural producers internalize the price of irrigation water. The export price effect is stronger when countries are net exporters of irrigated crops and weaker for internationally traded crops that constitute a pillar of most countries’ domestic food security, such as cereals. Our results provide elements for the broader issue of the economically efficient use of water resources in agriculture.

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