Limited water resources are increasingly constrained by growing water demand for agricultural, industrial, and domestic uses, which in turn exacerbates environmental degradation and water-quality problems. This research report develops and applies a comprehensive decision-support tool for examining these issues at the river-basin level—the natural unit of analysis for water allocation and use. Authors Ximing Cai, Claudia Ringler, and Mark Rosegrant develop an integrated hydrologic– economic river-basin model, simulating water flows, salinity balances, and crop growth under water-allocation scenarios. One of the main advantages of the model is its ability to reflect the dynamic interactions of essential hydrologic, agronomic, and economic components and to explore both the economic and environmental consequences of a wide variety of policy choices. Illustrating this, the authors use the framework to examine a variety of water-allocation mechanisms and policy options for the Maipo River Basin in Chile. The method developed here is relevant for other water economies and water-scarce river basins. The study also presents, for the first time, a practical application of the highly complex and changing relationship between system- and basin-level irrigation efficiencies, with important implications for water-related investments. Finally, the report studies the role of economic incentives in substituting scarce water resources for other farm-level crop inputs. It is hoped that this model will assist water management authorities and policymakers in choosing appropriate water policies and establishing reform priorities for water resource allocation.