The design of pricing policies for the management of water resources in agriculture under asymmetric information

The pricing method mostly adopted by water authorities (WAs) supplying water for irrigation through surface irrigation networks is the flat rate. This scheme violate either the Water Framework Directive (WFD) Incentive Pricing Principle (IPP) and Polluter Pays Principles (PPP), not providing incentives for efficient water uses and disregarding differences in irrigation water use among farmers. The use of flat rates is justified by the fact that monitoring water uses is too costly and even not effective, as WAs operate in conditions of hidden information. Under such conditions, by being unable to monitor water use, farmers have an information advantage against the WA. This fact exposes the WA to suffer a ‘pricing failure’ if it decides to apply an incentive pricing strategy (tariffs proportional to the alleged water uses). Indeed, farmers might exploit their information advantage behaving in an opportunistic way withdrawing more water than declared and finally paying less than they should. This would undermine the effectiveness and the efficiency of the WA’s pricing strategies. Under these circumstances the thesis investigates the design of incentive pricing options through a principal-agent model under full and asymmetric information, in a way of modulating water tariffs with farms’ water supply costs by irrigation. In addition, the thesis illustrates how asymmetry of information and transaction costs drive the WA to propose a less efficient contract solution due the rent extraction needed to reveal farms’ private information and guaranteeing the implementation of the pricing strategy. The main conclusion arising from this research turns to be that; the implementation of a pricing strategy depends upon the context surrounding the irrigation network.