An Optimal Water Resource Allocation Mechanism Based on Ex-Post Verification and Reward in Huangbai River

Abstract

Under the current administrative system (AS) in China, the water resources governor allocates limited water resources to several users to realize the utility of water resources, leading to a principal–agent problem. The governor (referred to as the principal and she) wishes to maximize water resource allocation efficiency, while each user (referred to as the agent and he) only wishes to maximize his own quota. In addition, the governor cannot know water demand information exactly since it is the water users’ private information. Hence, this paper builds an ex ante improved bankruptcy allocation rule and an ex post verification and reward mechanism to improve water allocation efficiency from the governor’s perspective. In this mechanism, the governor allocates water among users based on an improved bankruptcy rule before the water is used up, verifies users’ information by various approaches, and poses a negative reward to them if their information is found to be false after the water is used up. Then, this mechanism is applied to Huangbai River Basin. Research results show that the improved allocation rule could motivate users to report demand information more honestly, and ex post verification could motivate water users to further report their true information, which, as a result, could improve the water allocation efficiency. Furthermore, this mechanism could be applied to the allocation of other resources.