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Economics and Institutions of Water (Completed)

Completed work.

Project Coordinator: Ariel Dinar

Water is central to development and especially to rural development. Because water resources have direct impact on all sectors, the focus of the water resource management research is on both institutions and economic incentives and on their impact on improved management of water. With nearly 80-90 percent of the available water being used in irrigation, efficient use of irrigation water would have significant impact on the entire resource base. Therefore, several research efforts are undertaken in order to understand the economics of pricing of irrigation water.

The research program includes 5 studies:

  1. Guidelines for Pricing Irrigation Water Efficiency, Implementation Cost and Equity Consideration


1.  Water Institutions and Sector Performance
In response to increasing water scarcity, water institutions—formal and informal policy, legal, and administrative entities—are undergoing far-reaching changes worldwide. What is the cross-country experience in the evolution of water institutions, and do the changes advance or impede the water sector’s financial viability and resource sustainability? This project has addressed these questions through a comparative study of water institutions and their impact on the sector’s performance in selected industrial and developing countries. Since water institutions are a domain intersected by law, economics, and public policy and are strongly influenced by demography, resource endowment, and science and technology, the study’s approach was necessarily interdisciplinary. The study compared the water institutions of the 35 sample countries within a common framework defined by a set of institutional (legal, policy, and administrative) features focusing on economic and operational performance. It then carried out a comparative analysis of water sector performance based on qualitative and quantitative variables. Linking the comparative analysis of institutions with the analysis of sector performance allowed identification of both common and unique features in “best practice cases” and “worst cases.” The results provide the basis for deriving strategic options and action plans for strengthening institutions and improving their performance. The results indicate the relative strength, direction, and significance of the performance impact of institutional components and aspects. They suggest that the interaction of institutions and performance can derive from the general socioeconomic, political, and resource-related environment in which it occurs. And they strongly favor a sequential strategy for institutional reform. 

2.  Guidelines for Pricing Irrigation Water Efficiency, Implementation Cost and Equity Consideration
A growing trend of World Bank irrigation water projects stresses pricing as a primary means of regulation. In many cases the conditions for the disbursement of a loan for the construction of an irrigation project now requires “appropriate” pricing of the irrigation water that will be generated. Yet, it is not at all clear what exactly these “appropriate” water prices are and how should they be applied. It is also common to find disagreements among competing groups of water users, particularly if they are in different economic sectors. It is surprising to find that there is also disagreement among economists on how best to address this issue. The objective of this research was to clarify the basic concept of water pricing, and to lay out a set of guidelines on how to price irrigation water under different circumstances. The primary objective according to which performance is measured is that of efficiency, broadly defined to include implementation costs. Considerations of income distribution, available water institutions and political constraints will be considered in the context of the case studies. This research developed a guideline for the selection and implementation of water pricing methods. Countries involved: China, Mexico, Morocco, South Africa, Turkey.  

3.  Micro-Macro Linkages Irrigation Water Management
Most works on water policy and irrigation water pricing reforms are partial in nature, in that they focus on small regions--mainly farms, water districts, perimeters, or irrigation projects. However, efforts to reform water policy and improve water use efficiency from the perspective of the district alone, though necessary, may not be sufficient. In fact, the national level efforts of macro economic policy reform are intricately and jointly linked to water policy at the micro (district, perimeter, farm) level. The study will develop a macro-micro approach that links various levels and sectors of the economy with particular attention given to water resources management. Macro-micro linkages figure heavily in water resource management for a number of reasons. First, irrigation water is a key input of production to agricultural crops that are traded in domestic and international markets and are strongly influenced by policies that affect national and international prices, both directly and indirectly through the competition for economy-wide resources (labor, chemical and mechanical inputs). Second, the use of water resources typically entails external effects that extend beyond the individual user or district. Finally, as is typical of a spatial sector such as agriculture, variations in local conditions mean that national policies have differential local impacts so that the implementation of water allocation and distribution reforms depend on local conditions. Thus, it is critical that economy-wide to local linkages be considered since, for most countries, irrigated agriculture is not isolated to a single homogeneous perimeter. We apply CGE method to water economies that differ in almost any aspect while emphasizing the feedback linkages between macro policies and those at the region, district or farm levels. Such a comprehensive approach brings in economy-wide (general equilibrium) considerations that lie outside the scope of stand-alone micro (partial equilibrium) analyses and incorporate macro economic effects within micro unit decisions.  

4.  Monopoly Power and Distribution in Fragmented Markets: The Case of Groundwater
This research studies the market for groundwater extracted by private tubewells in Pakistan's Punjab province. Groundwater markets are characterized by barriers to entry and spatial fragmentation and thus are potentially monopolistic. In the study area, groundwater and tenancy contracts are often interlinked, with share-tenants gaining access to water through the use of their landlord’s tubewell. An analysis of groundwater transactions shows that tenants of tubewell owners are charged lower prices than other customers. Tubewell owners and their tenants also use considerably more groundwater on their plots than do other farmers. Taken together, this evidence suggest the presence of monopoly power in the groundwater market. Although the welfare cost of this distortion is found to be significant, it is small relative to total household income.


Hanan G. Jacoby, Rinku Murgai, Saeed Ur Rehman. 2004. "Monopoly Power and Distribution in Fragmented Markets: The Case of Groundwater." Review of Economic Studies 71(3): 783-808.

5.  Cooperative arrangements for Water Allocation under Competition among Water Use Sectors
Governments and developing agencies promote participatory approaches in solving common pool resource problems such as in the water sector.  Two main participatory approaches have been applied separately, namely negotiation and mediation. study we apply the Role-Playing Game that is a component of the Companion Modeling approach—a negotiation procedure, and Cooperative Game Theory (Shapley value and the Nucleolus solution concepts) that can be mirrored as a mediated mechanism, to a water allocation problem in the Kat watershed in South Africa.  While the absolute results of the two approaches differ, the negotiation and the cooperative game theory provide similar shares of the benefit allocated to the players from various cooperative arrangements.  Evaluating the two approaches provides useful tips for future extension for both the Role-Playing Games and the Cooperative Game Theory applications.


Dinar, Ariel, José Albiac, Joaquín Sánchez-Soriano, ed. 2008. Game Theory and Policy Making in Natural Resources and the Environment. Routledge

Dinar, Ariel, Shlomi Dinar, Stephen McCaffrey, and Daene McKinney. 2007. Bridges over Water: Understanding Transboundary Water Conflict, Negotiation and Cooperation. World Scientific Series on Energy and Resource Economics - Vol. 3 World Scientific Publishing Co. 

Research Working Papers
For more policy research working papers from the World Bank's institutional archives, search here using author’s last name, title or working paper number (“wpsxxxx”).
WPS4294Scarperation : an empirical inquiry into the role of scarcity in fostering cooperation between international river ripariansDinar, Shlomi; Dinar, Ariel; Kurukulasuriya, Pradeep2007/07
WPS4083Water allocation strategies for the Kat Basin in South Africa : comparing negotiation tools and game theory modelsDinar, Ariel; Farolfi, Stefano; Patrone, Fioravante; Rowntree, Kate2006/12
WPS4073Cooperative game theory and its application to natural, environmental, and water resource issues : 2. application to natural and environmental resourcesZara, Stefano; Dinar, Ariel; Patrone, Fioravante2006/11
WPS4074Cooperative game theory and its application to natural, environmental, and water resource issues : 3. application to water resourcesParrachino, Irene; Dinar, Ariel; Patrone, Fioravante2006/11
WPS3641Applications of negotiation theory to water issuesCarraro, Carlo; Marchiori, Carmen; Sgobbi, Alessandra2005/06
WPS3636Comparison of institutional arrangements for river basin management in eight basinsBlomquist, William; Dinar, Ariel; Kemper, Karin2005/06
WPS3637Decentralization of river basin management : a global analysisDinar, Ariel; Kemper, Karin; Blomquist, William; Diez, Michele; Sine, Gisele; Fru, William2005/06
WPS3550Feedback links between economy-wide and farm-level policies : application to irrigation water management in MoroccoRoe, Terry; Dinar, Ariel; Tsur, Yacov; Xinshen Diao2005/03
WPS3527Institutional and policy analysis of river basin management: the Murray Darling River Basin, AustrialiaBlomquist, William; Haisman, Brian; Dinar, Ariel; Bhat, Anjali2005/02
WPS3528Institutional and policy analysis of river basin management: the Warta River Basin, PolandBlomquist, William; Tonderski, Andrzej; Dinar, Ariel2005/02
WPS2628Monopoly power and distribution in fragmented markets : the case of groundwaterJacoby, Hanan G.; Murgai, Rinku; Rehman, Saeed Ur2001/06
WPS2425Are returns to investment lower for the poor? Human and physical capital interactions in rural Viet Namvan de Walle, Dominique2000/08
WTP447Evaluating water institutions and water sector performanceSaleth, R. Maria; Dinar, Ariel1999/08
WPS2045Water challenge and institutional response (a cross-country perspective)Saleth, R. Maria; Dinar, Ariel1999/01
WPS2028Access to markets and the benefits of rural roadsJacoby, Hanan G.1998/12

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