Determinants of Groundwater Price under Bilateral Bargaining with Multiple Modes of Contracts: A Case from Madhya Pradesh, India

In response to a concern about irrigation owners' exploitative pricing to buyers, this paper investigates the determinants of groundwater price in Madhya Pradesh, India. Observing bilateral negotiations over groundwater prices between water sellers and buyers, we explicitly incorporate the differences in bargaining power as one of the determinants. Since the past literature on land tenancy markets suggests that prices become higher under output sharing contracts, we also examine whether this applies to groundwater markets. Our empirical analyses show that output sharing buyers pay higher prices to the sellers than buyers under either fixed or flat charge contracts presumably due to a risk premium payment and an implicit interest payment. Furthermore, we found that the water price becomes higher when the buyers have no alternative water seller nearby. Although these premiums attached to the water price may not be considered excessively high under the constraint of imperfect contingent markets, if equity is to be achieved, the individuals who must be targeted first are output sharing buyers who have no alternative sellers.