Optimal subsidization for the adoption of new irrigation technologies

Wided Mattoussi, Foued Mattoussi and Afrah Larnaout

Economic Analysis and Policy, 2023, vol. 78, issue C, 1126-1141

Abstract: Cost-sharing subsidies partially cover the fixed costs of water-saving technologies, promoting their adoption as one of the major irrigation water demand management tools that improve on-farm irrigation system efficiency and potentially free up more water for higher-value uses in water-scarce areas. In this study, we investigate the optimal subsidization scheme in the presence of adverse selection problems where the farmer’s wealth is her private information using a theoretical model of a centralized regulatory structure. In the model, we show that the first-best investment levels can be implemented when the regulator has enough resources for subsidization. Otherwise, the outcome depends on which farmer – the high-wealth farmer or the low-wealth one – contributes more to the social welfare when confronted with their first-best investment levels. Particularly, the model’s findings suggest that an optimal subsidization scheme might involve either high or low wealth farmer’s investment level being downward distorted from their first-best levels. Furthermore, in some circumstances, if the wealth disparity is sufficiently large, it is optimal to subsidize high wealth farmers only. Overall, prioritizing economic efficiency may help conserve scarce irrigation water, but it may also conflict with social equity by denying some farmers access to public subsidies.

Keywords: Asymmetric information; Centralized water management; Irrigation water; Water-saving technology; Subsidization scheme (search for similar items in EconPapers)
JEL-codes: D82 O13 O33 Q15 Q16 Q25 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecanpo:v:78:y:2023:i:c:p:1126-1141

DOI: 10.1016/j.eap.2023.04.020

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