IDEAS home Printed from https://ideas.repec.org/a/eee/agiwat/v309y2025ics0378377425000435.html

An “initial-engineering-end use” quasi-market pricing mechanism under cascading risk for cross-regional water rights trading

Author

Listed:
  • Li, Xuxia
  • Wang, Huimin
  • Liu, Gang
  • Yang, Liu
  • Fang, Zhou
  • Xiao, Yi
  • Lai, Xiaoying
  • Gao, Li
  • Teng, Ying

Abstract

Water rights trading within a market economy has emerged as an effective solution for enhancing water use efficiency and addressing water scarcity. However, the development of a pricing mechanism that accounts for the spatial heterogeneity of water resources remains a critical challenge. This study proposes an “initial-engineering-end use” quasi-market pricing mechanism based on empirical research of cross-regional water rights trading in Pingxiang, Jiangxi, China. The mechanism comprises three stages, each designed to address specific risks. To support these stages, data from field studies is used to calibrate three unique pricing models: the stochastic differential game, incomplete contract theory, and the Nash-bargaining model. We analyze the interactions among equilibrium water prices across these stages to explore the cascade effects. In Pingxiang, the local government has successfully adopted and implemented this mechanism. Empirical results and practical applications reveal several key findings. (1) A comparative analysis of national governance across different countries indicates that the quasi-market pricing mechanism effectively determines end use water prices in China. (2) Initial corporate and government investments mitigate trading risks and enhance stability. (3) Overlooking ecosystem service value leads to the undervaluation of initial and end use water prices. (4) Practical applications of the proposed mechanism in Inner Mongolia, China, and the Murray-Darling Basin, Australia, demonstrate that end use water prices are generally higher in water-scarce regions. Overall, this study provides a practical and adaptable approach for pricing cross-regional water rights trading, applicable to both water-rich and water-scarce regions globally.

Suggested Citation

  • Li, Xuxia & Wang, Huimin & Liu, Gang & Yang, Liu & Fang, Zhou & Xiao, Yi & Lai, Xiaoying & Gao, Li & Teng, Ying, 2025. "An “initial-engineering-end use” quasi-market pricing mechanism under cascading risk for cross-regional water rights trading," Agricultural Water Management, Elsevier, vol. 309(C).
    • Handle: RePEc:eee:agiwat:v:309:y:2025:i:c:s0378377425000435
    DOI: 10.1016/j.agwat.2025.109329
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378377425000435
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.agwat.2025.109329?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Chen, Xiang-nan & Wu, Feng-ping & Li, Fang & Zhao, Yue & Xu, Xia, 2022. "Prediction and analysis of water rights trading volume: Based on the water rights trading in Inner Mongolia, China," Agricultural Water Management, Elsevier, vol. 272(C).
    2. Veettil, Prakashan Chellattan & Speelman, Stijn & Frija, Aymen & Buysse, Jeroen & van Huylenbroeck, Guido, 2011. "Complementarity between water pricing, water rights and local water governance: A Bayesian analysis of choice behaviour of farmers in the Krishna river basin, India," Ecological Economics, Elsevier, vol. 70(10), pages 1756-1766, August.
    3. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    4. Ali Kharrazi & Shogo Kudo & Doreen Allasiw, 2018. "Addressing Misconceptions to the Concept of Resilience in Environmental Education," Sustainability, MDPI, vol. 10(12), pages 1-12, December.
    5. Sarah Ann Wheeler, 2022. "Debunking Murray‐Darling Basin water trade myths," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 66(4), pages 797-821, October.
    6. Ioslovich, Ilya & Gutman, Per-Olof, 2001. "A model for the global optimization of water prices and usage for the case of spatially distributed sources and consumers," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 56(4), pages 347-356.
    7. Wang, Lizhong & Fang, Liping & Hipel, Keith W., 2008. "Basin-wide cooperative water resources allocation," European Journal of Operational Research, Elsevier, vol. 190(3), pages 798-817, November.
    8. Seidl, Constantin & Wheeler, Sarah Ann & Zuo, Alec, 2020. "High turbidity: Water valuation and accounting in the Murray-Darling Basin," Agricultural Water Management, Elsevier, vol. 230(C).
    9. Zhang, Cheng-Yao & Oki, Taikan, 2023. "Water pricing reform for sustainable water resources management in China’s agricultural sector," Agricultural Water Management, Elsevier, vol. 275(C).
    10. Mahan, Robert C. & Horbulyk, Theodore M. & Rowse, John G., 2002. "Market mechanisms and the efficient allocation of surface water resources in southern Alberta," Socio-Economic Planning Sciences, Elsevier, vol. 36(1), pages 25-49, March.
    11. Zhao, Jing & Ni, Hongzhen & Peng, Xiujian & Li, Jifeng & Chen, Genfa & Liu, Jinhua, 2016. "Impact of water price reform on water conservation and economic growth in China," Economic Analysis and Policy, Elsevier, vol. 51(C), pages 90-103.
    12. Chou, Lichen & Dai, Jie & Qian, Xiaoyan & Karimipour, Aliakbar & Zheng, Xuping, 2021. "Achieving sustainable soil and water protection: The perspective of agricultural water price regulation on environmental protection," Agricultural Water Management, Elsevier, vol. 245(C).
    13. Ahmed, A.A. Masrur & Wang, Quan J. & Western, Andrew W. & Graham, Tristan D.J. & Wu, Wenyan, 2024. "Monthly disaggregation of annual irrigation water demand in the southern Murray Darling Basin," Agricultural Water Management, Elsevier, vol. 302(C).
    14. Meghdad Attarzadeh & David K.H. Chua & Michael Beer & Ernest L.S. Abbott, 2017. "Options-based negotiation management of PPP–BOT infrastructure projects," Construction Management and Economics, Taylor & Francis Journals, vol. 35(11-12), pages 676-692, December.
    15. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
    16. Fang, Lin & Zhang, Lin, 2020. "Does the trading of water rights encourage technology improvement and agricultural water conservation?," Agricultural Water Management, Elsevier, vol. 233(C).
    17. Brownson, Katherine & Anderson, Elizabeth P. & Ferreira, Susana & Wenger, Seth & Fowler, Laurie & German, Laura, 2020. "Governance of Payments for Ecosystem Ecosystem services influences social and environmental outcomes in Costa Rica," Ecological Economics, Elsevier, vol. 174(C).
    18. Sato, Masahiro & Kharrazi, Ali & Nakayama, Hirofumi & Kraines, Steven & Yarime, Masaru, 2017. "Quantifying the supplier-portfolio diversity of embodied energy: Strategic implications for strengthening energy resilience," Energy Policy, Elsevier, vol. 105(C), pages 41-52.
    19. Cuimei Lv & Huiqin Li & Minhua Ling & Xi Guo & Zening Wu & Changkuan Gu & Yang Li, 2021. "An Innovative Emergy Quantification Method for Eco-economic Compensation for Agricultural Water Rights Trading," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 35(3), pages 775-792, February.
    20. Tsur, Yacov, 2020. "Optimal water pricing: Accounting for environmental externalities," Ecological Economics, Elsevier, vol. 170(C).
    21. El-Khattabi, Ahmed Rachid & Eskaf, Shadi & Isnard, Julien P. & Lin, Laurence & McManus, Brian & Yates, Andrew J., 2021. "Heterogeneous responses to price: Evidence from residential water consumers," Journal of Environmental Economics and Management, Elsevier, vol. 107(C).
    22. Pashanejad, Ehsan & Kharrazi, Ali & Araujo-Gutierrez, Zuelclady M.F. & Robinson, Brian E. & Fath, Brian D. & Parrott, Lael, 2024. "A functional connectivity approach for exploring interactions of multiple ecosystem services in the context of agricultural landscapes in the Canadian prairies," Ecosystem Services, Elsevier, vol. 68(C).
    23. Danyang Di & Zening Wu & Huiliang Wang & Cuimei Lv, 2020. "A Double-Layer Dynamic Differential Game Model for the Optimal Trading Quantity of Water and Price Setting in Water Rights Transactions," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 34(1), pages 245-262, January.
    24. Jan P. Crouter, 1987. "Hedonic Estimation Applied to a Water Rights Market," Land Economics, University of Wisconsin Press, vol. 63(3), pages 259-271.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Peter G. Klein & Michael E. Sykuta, 2010. "Editors’ Introduction," Chapters, in: Peter G. Klein & Michael E. Sykuta (ed.), The Elgar Companion to Transaction Cost Economics, chapter 1, Edward Elgar Publishing.
    2. Hu, Zhineng & Chen, Yazhen & Yao, Liming & Wei, Changting & Li, Chaozhi, 2016. "Optimal allocation of regional water resources: From a perspective of equity–efficiency tradeoff," Resources, Conservation & Recycling, Elsevier, vol. 109(C), pages 102-113.
    3. Surajeet Chakravarty & W. Bentley MacLeod, 2006. "Construction Contracts (or “How to Get the Right Building at the Right Price?”)," CESifo Working Paper Series 1714, CESifo.
    4. Oliver Hart, 2013. "Noncontractible Investments and Reference Points," Games, MDPI, vol. 4(3), pages 1-20, August.
    5. Schmitz, Patrick W., 2021. "On the optimality of outsourcing when vertical integration can mitigate information asymmetries," Economics Letters, Elsevier, vol. 202(C).
    6. Nathan H. Miller, 2008. "Competition When Consumers Value Firm Scope," EAG Discussions Papers 200807, Department of Justice, Antitrust Division.
    7. Patrick W. Schmitz, 2006. "Book Review," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 162(3), pages 535-542, September.
    8. Markus Solf, 2004. "Unternehmenskooperationen als Folge von Informations- und Kommunikations-technologieveränderungen: Eine theoretische Analyse," Schmalenbach Journal of Business Research, Springer, vol. 56(2), pages 146-167, March.
    9. Kim, Jongwook & Mahoney, Joseph T., 2008. "A Strategic Theory of the Firm as a Nexus of Incomplete Contracts: A Property Rights Approach," Working Papers 08-0108, University of Illinois at Urbana-Champaign, College of Business.
    10. Xu, Chenggang & Zhang, Xiaobo, 2009. "The evolution of Chinese entrepreneurial firms: Township-village enterprises revisited," IFPRI discussion papers 854, International Food Policy Research Institute (IFPRI).
    11. W. Bentley MacLeod, 1997. "Complexity, Contract and the Employment Relationship," Boston College Working Papers in Economics 342., Boston College Department of Economics.
    12. Patrick W. Schmitz, 2006. "Information Gathering, Transaction Costs, and the Property Rights Approach," American Economic Review, American Economic Association, vol. 96(1), pages 422-434, March.
    13. Hoppe, Eva I. & Kusterer, David J. & Schmitz, Patrick W., 2013. "Public–private partnerships versus traditional procurement: An experimental investigation," Journal of Economic Behavior & Organization, Elsevier, vol. 89(C), pages 145-166.
    14. Gilles Hilary & Sterling Huang, 2023. "Trust and Contracting: Evidence from Church Sex Scandals," Journal of Business Ethics, Springer, vol. 182(2), pages 421-442, January.
    15. Hideshi Itoh, 2006. "The Theories of International Outsourcing and Integration : A Theoretical Overview from the Perspective of Organizational Economics," Microeconomics Working Papers 21891, East Asian Bureau of Economic Research.
    16. de Bragança, Gabriel Godofredo Fiuza & Daglish, Toby, 2017. "Investing in vertical integration: electricity retail market participation," Energy Economics, Elsevier, vol. 67(C), pages 355-365.
    17. Nadav Levy, 2024. "Partial ownership, control, and investment in vertical relationships," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 33(1), pages 247-266, January.
    18. Jackie Krafft, 2006. "Business history and the organization of industry," Post-Print hal-00211780, HAL.
    19. Claire A. Hill & Brett H. McDonnell, 2012. "Introduction: The Evolution of the Economic Analysis of Corporate Law," Chapters, in: Claire A. Hill & Brett H. McDonnell (ed.), Research Handbook on the Economics of Corporate Law, chapter 1, Edward Elgar Publishing.
    20. Ricard Gil & Frederic Warzynski, 2015. "Vertical Integration, Exclusivity, and Game Sales Performance in the US Video Game Industry," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 31(suppl_1), pages 143-168.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:agiwat:v:309:y:2025:i:c:s0378377425000435. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/agwat .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.