On the Design of Total Water Use-Based Incentive Schemes for Sustainable Groundwater Management

This paper sheds light on the design of various incentive schemes to face the unsustainable groundwater over-pumping by farmers. The response of the Water Authority in tackling this over-exploitation will differ according to whether it uses an incentive scheme based on the individual farmer’s water use, which is his/her own private information, or it resorts to a total-water-use-based incentive schemes, where the total water use is publicly observable. Two schemes will be discussed. The first one corresponds to the framework of moral hazard in team problems where the Water Authority administers incentive schemes that do not balance the budget, thereby restoring water use efficiency. In the second scheme, the WA promotes the cooperative behavior. We show how cooperative management institutions can reduce water overuse and improve incentives for efficient water use, by inducing peer monitoring by cooperative members. We show that water overuse is more likely when punishments are weak and cooperatives are large. We also extend the basic analysis to allow for collusion in monitoring between cooperative members and compare different monitoring structures.