Three essays on the economics of water management in agriculture

This dissertation presents three essays on the economics of water management in agriculture. The overarching objective of the dissertation is to explore the effects of institutional setting and biophysical complexity on individual decisions around water use as an input. The focus of the dissertation is on agricultural systems that use groundwater as a source of irrigation. The first essay is an empirical study of the role of trading ratios and search frictions in a groundwater market with spatial externalities. Econometric results suggest that the use of trading ratios can indeed provide incentives for market participants to reallocate resources in a way that reduces spatial externalities. In the localized informal market I study, search frictions can be significant, with estimated loss of efficiency of up to 40%. In the second essay, I develop an analytical framework to explore policy implications of limitations imposed on groundwater flow rates by underlying aquifer characteristics. I find that limitations on the instantaneous supply of groundwater can affect irrigation decisions nonlinearly with a threshold effect. A profit-maximizing farmer with maximum available water flow rate below the threshold adjusts irrigation decisions on both the extensive (inter-seasonal) and intensive (intra-seasonal) margins. Above the threshold, optimally only intensive margin adjustment occurs. I further explore the role of heterogeneity in aquifer characteristics on the effectiveness of different aquifer management policies for Chase County, Nebraska, using a numerical model. I find that under conditions of heterogenous instantaneous water availability, the burden of different policies may fall on different groups of water users in ways that have not been previously described. This result suggests that policy makers may need to consider the distributional effects of water management policies as well as their cost effectiveness. Finally, in the third essay, I analyze the effects of groundwater depletion on the loss of buffer value of an aquifer. The chapter develops a framework that captures nonlinearities in the effect of aquifer levels on the instantaneous supply of groundwater as well as the intra-seasonal nature of irrigation decisions. Applying the methodology to a portion of the High Plains Aquifer, I find that the costs of aquifer depletion may be greater than previously considered. Specifically, I show that loss of profit due to the inability to use groundwater to buffer against intra-seasonal variations of weather can be an order of magnitude higher than the loss of profit due to increased pumping costs. I also find that changes in aquifer levels have had quite different effects on buffer values across the area considered. The results suggest that while, on average, benefits to aquifer management in a given area may be small, there may be localized regions with large benefits