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

Abstract

Groundwater over-pumping by manipulating water meters may constraint the efficient use of the resource, leading to the potential aquifers’ deterioration. Well designed institutional arrangements might be effective at reducing over-exploitation. The objective of this research was to shed light on the design of various incentive schemes to face groundwater over-pumping ranging from individual water use-based incentive schemes, where individual withdrawals are the users’ private information, to total water use-based incentive schemes, where the aggregate withdrawal is publicly observable. For the latter setting, two schemes were proposed. The first one is within the framework of moral hazard in teams, where the Water Authority administers monetary incentives that do not balance the budget, restoring thereby the full-information outcome. The second scheme promotes a cooperative management governed by a collective responsibility rule that induces peer monitoring by members. We show that groundwater overuse is more likely when monitoring costs are high, punishments are weak and cooperatives are large. We also show how the cooperative size and punishments are determined endogenously by constraints on monitoring. We extend the basic analysis to study collusion in monitoring between cooperative members and compare different monitoring structures. The results confirm that well-designed incentives and institutions can reduce groundwater over-exploitation, and that constraints on monitoring costs affect institutional design.