Bontems, Philippe and Nauges, Céline (2019) Production decisions with water markets: The role of initial allocations and forward trading. European Review of Agricultural Economics, vol. 46 (n° 4). pp. 579-608.

Preview

Text Download (285kB) | Preview

Abstract

We develop a theoretical model that describes risk-averse farmers’ decisions when facing production risk due to uncertain weather conditions and when irrigation water can be traded on a market. We focus on the role of initial water allocations granted to irrigated farms at the start of the season. The presence of water markets makes the future water price uncertain and hence the value of initial water allocations uncertain. We analyse the properties of this background risk and study how initial water allocations impactfarmers’ land allocation decisions between an irrigated crop and a non-irrigated crop, both characterised by random expected net returns. We then extend the model by permittingirrigation water to be traded ex-ante at a known price (forward market). Finally, we illustrate our main theoretical findings using simulations. We calibrate distributions of the random variables based on observed data from the Murray-Darling Basin in Australia where a water market has been in place for several decades.

Available Versions of this Item

• Production choices with water markets. (deposited 18 May 2017 13:01)
  • Production decisions with water markets: The role of initial allocations and forward trading. (deposited 16 Nov 2018 15:32) [Currently Displayed]