Paper Number: 2009-05

Document Date: 10/2009

Author(s): Stergios Athanassoglou, Glenn Sheriff, Tobias Siegfried and Woonghee Tim Huh

Subject Area(s): Water Resources

Keywords: groundwater; differential games; imperfect monitoring

Abstract: Standard economic models of groundwater management assume perfect transmissivity (i.e., the aquifer behaves as a bathtub), no external effects of groundwater stocks, and/or homogenous agents. In this article, we develop a model relaxing these assumptions. Although our model generalizes to an arbitrary number of cells, we are able to obtain key insights with a two-cell finite-horizon differential game. We find a simple linear mechanism that induces the socially optimal extraction path in Markov-perfect equilibrium. Moreover, implementation requires that the regulator need only monitor the state of the resource (e.g., depth of the aquifer), not individual extraction rates. We illustrate the mechanism with a simulation based on data from the Indian state of Andhra Pradesh. The simulation suggests that significant welfare loss may occur if the regulator disregards physical and economic complexity.

This paper is part of the Environmental Economics Working Paper Series.

• Simple Mechanisms for Managing Complex Aquifers (PDF)(32 pp, 807 K, 10/2009)