Water allocation between the agricultural and the municipal sectors under scarcity: A financial approach analysis

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Abstract

A model examining the National Water Wealth (NWW) and its allocation between the municipal sector and the agricultural sector, where water value is defined as the present value ofWater Rights, is presented. Five factors are considered: (i) uncertainty of water supply; (ii) population growth rate; (iii) the effect of time on NWW without new water production; (iv) agency costs, and; (v) production of new waters. The work is based on the model by Jensen and Meckling (J Finance Econ. 3:305-360, 1976), dealing with the effects of agency costs on the value of public companies. Agency costs are subject to conflicting interests between managers, shareholders and bondholders. In the water economy agency, costs stem from a divergence of interests between the government, the agricultural and the municipal sectors. Uncertainty of supply reduces water wealth of both sectors, with a stronger adverse impact on water wealth of the agricultural sector. Our model shows how production of new waters can have contributive effects on national water wealth. The modeling demonstrates the option of reducing the overall uncertainty of water supply and production of new waters which leads to favorable effects on the national water wealth.

Original languageEnglish
Article numberA002
Pages (from-to)3481-3501
Number of pages21
JournalWater Resources Management
Volume29
Issue number10
DOIs
StatePublished - 1 Aug 2015

Keywords

  • Agency costs
  • Agricultural sector
  • Conflicting interests
  • Municipal sector
  • National Water Wealth
  • New waters
  • Water allocation
  • Water rights

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