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Efficiency and equity in groundwater markets: the case of Madhya Pradesh, India

Published online by Cambridge University Press:  21 November 2005

KEI KAJISA
Affiliation:
Foundation for Advanced Studies on International Development (FASID), and National Graduate Institute for Policy Studies (GRIPS), Tokyo, Japan
TAKESHI SAKURAI
Affiliation:
Policy Research Institute, Ministry of Agriculture, Forestry and Fisheries (PRIMAFF), Tokyo, Japan

Abstract

This paper examines efficiency and equity in groundwater markets with special attention to output sharing contracts and to the bargaining relationships between sellers and buyers, using household level data from Madhya Pradesh, India. Regression results find no significant inefficiency on farms managed by output sharing buyers, presumably because optimal input intensities are achieved through effective monitoring and contract adherence mechanisms embedded in long-term and intensive personal relationships between sellers and buyers. As for equity, the finding is that, while output sharing buyers pay higher water prices, the rate of premiums is merely 5 percentage points higher than the informal interest rate that they would have had to carry under other types of groundwater contracts. The results also show that buyers who have access to alternative water sellers pay lower water prices. These findings indicate that if the imperfection of credit and contingent markets in rural areas are taken into account, informal groundwater markets work fairly well in agrarian communities if monitoring and contract adherence mechanisms are embedded and a sufficient number of potential sellers are available.

Type
Research Article
Copyright
2005 Cambridge University Press

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Footnotes

This study was funded by Global Environment Research Fund through Ministry of Environment, Japan. The authors thank the Indian Institute of Forest Management for their collaboration in the fieldwork. We acknowledge useful comments from two anonymous referees, Yujiro Hayami, Kaliappa Kalirajan, Taejon Kim, Keijiro Otsuka, Thomas Reardon, John Strauss as well as editorial assistance from Suzanne Akiyama. All remaining errors are ours.
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