Modelling water markets under uncertain water supply

Javier Calatrava and Alberto Garrido

European Review of Agricultural Economics, 2005, vol. 32, issue 2, 119-142

Abstract: This paper looks at the risk dimension of water markets under uncertain water supply. We model market participants' decisions under uncertainty and evaluate gains from trade under two different market arrangements. These differ in the confidence that irrigators can place in the water market-clearing processes, and their chances of pursuing tactical responses to deal with supply uncertainty. A two-stage stochastic model, that simulates both market arrangements, is applied to an irrigation district of Southern Spain. We show that centralised water markets, perhaps brokered by the water authority, lead to more efficient allocation and resource use than decentralised markets. The paper highlights the importance of providing a reliable market setting. Copyright 2005, Oxford University Press.

Date: 2005
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European Review of Agricultural Economics is currently edited by Timothy Richards, Salvatore Di Falco, Céline Nauges and Vincenzina Caputo

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