1 Water Management in the ‚Moral Hazard Trap’ The Example of Irrigation1

In a world of growing water scarcity, a key challenge consists in efficieny improvements in irrigated agriculture. Common reactions to this challenge focus on technical, financial and/or organisational improvements. While such efforts may be well justified in many cases, they often run the risk of overlooking some of the major causes for inefficiencies in the first place. These problems relate to the fact that efficieny deficits may be well in the interest of most of the influential stakeholders involved. It is here, where so-called “Principal-Agent ” problems and the related “Moral Hazard”situations deserve attention, since they open doors to rentseeking and corruption. This paper, which refers to initiatives in the context of irrigation sector reforms in Andhra Pradesh, India, in the wake of the Farmers ’ Management of Irrigation Systems Act (FMISA) of 1997, does not aim at reflecting the actual situation of irrigation in Andhra Pradesh. Instead, referring to the situation at the end of the 1990s, it seeks to illustrate how concepts of “Principal-Agent ” theory may be applied in practical cases where efficient and effective irrigation management is seriously hampered by deficient exchange relationships between the relevant stakeholders. The paper analyses the institutions for irrigation fee collection and water delivery in the Sriramsagar irrigation scheme and shows how some of the reform initiatives were geared to resolve substantial Moral Hazard dead locks. 1