Water buyback is an increasingly accepted policy to restore environmental flows threatened by overallocation. Purchase tenders compensate irrigators who decide to surrender (part of) their right to withdraw water, provided effective use exists. A major concern in water buyback involves the extent of the compensation and rent-seeking behavior: targeted environmental goals often constraint government agencies to trade in specific catchments and flow conditions, and this results in narrow markets with a limited number of bidders. The efficiency of water buyback is therefore conditioned to the capacity of this policy to place bids consistent with the shadow price of the would-be seller and thus limit rent extraction. This demands an in-depth knowledge of sellers’ behavior. This paper uses a revealed preference method to estimate the objective function of irrigators. Agents are then confronted with decreasing water allocations to reveal the shadow price of irrigation water. The capitalized value of the shadow price provides a benchmark to inform and assess water purchase tenders. Calibration and simulation stages are illustrated with a case study in the overexploited Segura River Basin in SE Spain.

This seminar has been jointly organized by FEEM and IEFE, Bocconi University.