How to Improve Water Resources Allocation Efficiency: A Two-Stage Performance-Based Allocation Mechanism

Abstract

The fact that the water resource governor has to allocate limited water resources to two competing agricultural water users under the administrative system (AS) leads to a principal-agent issue. Hence, this paper constructs a two-stage performance-based allocation mechanism to motivate two competing water users (referred to as the agents) to act in accordance with the interests of the governor (referred to as the principal). This mechanism is about the interaction between the governor and two water users. The governor aims to improve water resources allocation efficiency and balance economic and environmental development, while each agricultural user focuses on the overall amount of water resources they have to operate and would like to ignore environment protection issues. Besides, the total water resources invested into production or environment is two water users’ private information, which is unknown to the governor. In the first stage, the governor allocates water resources between two users according to their previous performances, including production and environmental aspects. Results indicate that the equilibrium state of this mechanism could encourage two water users to focus on production and environment performances simultaneously and to help the governor transfer the pollution cost to two water users under the external of pollution cost, which motivates them to compete for available water resources. This competition between two users will directly affect users’ behaviors. These results could improve water resources allocation efficiency significantly and realize the sustainability of water resources in the agricultural field under the current AS. This perspective could also provide a new insight for the management of agricultural water resources allocation and offer relative decision support to relative governors.