Markets, Contracts, and Uncertainty in a Groundwater Economy

50 Pages Posted: 19 Jul 2016 Last revised: 27 Apr 2018

See all articles by Xavier Giné

Xavier Giné

World Bank - Development Research Group (DECRG)

Hanan G. Jacoby

World Bank - Agriculture and Rural Development Department; World Bank - Development Research Group (DECRG)

Date Written: June 6, 2016

Abstract

Groundwater is a vital yet threatened resource in much of South Asia. This paper develops a model of groundwater transactions under payoff uncertainty arising from unpredictable fluctuations in groundwater availability during the agricultural dry season. The model highlights the trade-off between the ex post inefficiency of long-term contracts and the ex ante inefficiency of spot contracts. The structural parameters are estimated using detailed micro-data on the area irrigated under each contract type combined with subjective probability distributions of borewell discharge elicited from a large sample of well-owners in southern India. The findings show that, while the contracting distortion leads to an average welfare loss of less than 2 percent and accounts for less than 50 percent of all transactions costs in groundwater markets, it has a sizeable impact on irrigated area, especially for small farmers. Uncertainty coupled with land fragmentation also attenuates the benefits of the water-saving technologies now being heavily promoted in India.

Keywords: Hydrology, Water and Food Supply, Climate Change and Agriculture, International Trade and Trade Rules, Regulatory Regimes, Social Policy, Common Property Resource Development, Legal Products, Judicial System Reform, Legislation, Legal Reform, Microfinance

Suggested Citation

Gine, Xavier and Jacoby, Hanan G., Markets, Contracts, and Uncertainty in a Groundwater Economy (June 6, 2016). World Bank Policy Research Working Paper No. 7694, Available at SSRN: https://ssrn.com/abstract=2811341

Xavier Gine (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

HOME PAGE: https://sites.google.com/site/decrgxaviergine/

Hanan G. Jacoby

World Bank - Agriculture and Rural Development Department ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

HOME PAGE: http://econ.worldbank.org/staff/hjacoby

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

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