Measuring the Gains to Groundwater Management with Recursive Utility

Replaced with revised version of paper 07/20/05.Recursive Utility, Dynamic Games, Groundwater Policy, Resource /Energy Economics and Policy, D91, C73, Q25,

Income Distributional Effects of Using Market-Based Instruments for Managing Common Property Resources

In the face of growing management problems and conflicts over increasing demands and dwindling or increasingly variable supplies of surface and groundwater, the need for revising the conventional water resource allocation methods has been increasingly felt among natural resource managers and policy makers. For the past 30 years economists have advocated for the application of various types of market-based instruments (MBIs) as an efficient means of effecting the re-allocation water resources among competing uses. While MBIs have been implemented in several countries, they have continued to encounter strong socio-political opposition, due to the impacts imposed on third-parties during transfers and re-allocations, as well as the distributional effects across different types of water users. Despite the demonstrable efficiency gains of MBIs, the resulting equity or distributional effects of MBI-driven re-allocations can be of equal or greater importance to policy-makers and the constituents that they serve. At the same time, the realized gains in economic efficiency from the application of MBIs depend heavily on the heterogeneity of the agents they are targeted towards, as well as the degree of information asymmetry that the regulator faces. In this paper, we use a simple theoretical framework to show the trade-offs between efficiency and equity that might arise from the application of MBIs to a heterogenous population of agents drawing non-cooperatively from a natural resource pool. Using the idealized centralized planner as a benchmark of dynamic, allocative efficiency, we compare the realized efficiency gains that can be realized by alternative policy instruments and the resulting impacts on distributional equity, in terms of the cumulative net benefits over time. Using the specific example of groundwater and the empirical setting of Southern California, we are able to highlight the trade-offs between efficiency and equity that might exist among alternative policy instruments, and how MBIs perform with respect to those dual criteria. We find that under agent heterogeneity, there are asymmetric gains in efficiency when the centralized planner allocations are constrained by equity considerations. Through such results, this paper demonstrates the importance of considering both efficiency gains and the minimization of disparities in distributional inequity, when designing policy instruments that create winners and losers with potentially serious socio-political ramifications.Resource /Energy Economics and Policy,

Estimating Disaggregate Production Functions: An Application to Northern Mexico

This paper demonstrates a robust method for achieving disaggregation in the estimation of flexible-form farm-level multi-input production functions using minimally-specified data sets. Since our ultimate goal is to address important questions related to the distributional effects of policy changes, we place emphasis on the ability of the model to reproduce the characteristics of the existing production system and to predict the outcomes of these changes at a high level of disaggregation. Achieving this requires the use of farm-level models that are estimated across a wide spectrum of sizes and types, which is often difficult to do with traditional econometric methods, due to limitations of data. The approach to estimating flexible-form production functions used in this paper overcomes these limitations, and also avoids the problems that frequently hinder the application of budget-based representative farm models to these type of analyses namely, that of poor calibration to observed behavior. In our estimation procedure, we use a two-stage approach that first generates a set of observation-specific shadow values for incompletely priced inputs, such as irrigation water or family labor, which are used in the second stage, along with the nominal input prices, to produce estimates of crop-specific production functions using Generalized Maximum Entropy (GME) methods. These functions are able to capture the individual heterogeneity of the local production environment, while still allowing the production function to replicate the input usage and outputs produced in the sample data. Since we are able to generate demand, supply, and substitution elasticities, a wide range of policy responses can be modeled. Our paper demonstrates this methodology through an empirical application to Mexico, drawing from a small set of cross-section data collected in the northern Rio Bravo regions. The estimates show that there is considerable heterogeneity in the behavioral response of farmer households of different sizes, both in terms of the returns to scale, as well as in the elasticities of substitution and derived demands for water. Compared to the aggregate-level estimation, we obtain much more accurate and informative policy response behavior, when shocks are imposed on the model.Research Methods/ Statistical Methods,

Measuring irrigation performance in Africa:

"The paper develops indicators to look at the performance of the irrigation sector in Sub-Saharan Africa, where demand for food is high and irrigation has a proven potential to boost levels of agricultural productivity. By looking at six indicator categories—institutional framework, water resource use, irrigation area, irrigation technology, agricultural productivity, and poverty and food security—we assess the potential for improving performance in the agricultural food security sector through increasing irrigation sector investments. The indicators on water resource use indicate ample room for further development of the resource. The share of cultivated area equipped for irrigation in Africa is about a third of the world average and just one-sixth of the value for Asia. The low coverage of irrigation technology and the slow rate of growth in coverage clearly represent a lost opportunity for Africa and a tremendous potential for future investment and policy effort. Finally, African countries produce 38 percent of their crops (by value) from approximately 7 percent of their cultivated land on which water is managed, which again suggests that additional investment in irrigation would pay large benefits. The disproportionate contribution to agricultural production of Africa's small irrigated area suggests that returns on additional investment in irrigation would be high, both in terms of greater food security for the continent and greater production of export-quality agricultural goods." from authors' abstractIrrigation performance, Agricultural production, Water resources,

RECONSTRUCTING DISAGGREGATE PRODUCTION FUNCTIONS

This paper demonstrates a method for reconstructing flexible form production functions using minimal disaggregated data sets. The policy focus of our approach puts emphasis on the ability of the model to reproduce the existing production system and predict the disaggregate outcomes of policy changes. We combine Positive Mathematical Programming (PMP) with Generalized Maximum Entropy (GME) estimation to capture the individual heterogeneity of the local production environment, and allow the reconstructed production function to precisely replicate the input usage and outputs produced in the base year. Since we can generate demand, supply and substitution elasticities from the reconstructed model we can represent a wide range of policy responses. The empirical application used in this paper is a production model of California's irrigated crop sector that was constructed to measure the economic effect of environmental policy changes to irrigation water supplies, as part of a joint State and Federal program termed CalFed. We demonstrate that the disaggregate regional models give greater predictive precision, when compared with the model reconstructed on the aggregate data, and that they show a significant variation in the calculated regional elasticities of input demand and output response. From this, we conclude that any gains from aggregation - namely the reduction of small sample bias of the parameter estimates - would be swamped by the distortion of production response to policy changes, given the heterogeneity of the regions and the resultant bias.Production Economics,

Are Biofuels Good for African Development? An Analytical Framework with Evidence from Mozambique and Tanzania

Many low income countries in Africa are optimistic that producing biofuels domestically will not only reduce their dependence on imported fossil fuels, but also stimulate economic development, particularly in poorer rural areas. Skeptics, on the other hand, view biofuels as a threat to food security in the region and as a landgrabbing opportunity for foreign investors. As a result of this ongoing debate, national biofuels task forces have been asked to evaluate both the viability of domestic biofuels production and its broader implications for economic development. To guide these complex evaluations, this paper presents an analytical framework that prioritizes different aspects of a comprehensive national assessment and identifies suitable evaluation methods. The findings from recent assessments for Mozambique and Tanzania are used to illustrate the framework. While these two country studies found that biofuels investments could enhance development, their experiences highlight potential tradeoffs, especially at the macroeconomic and environmental levels, where further research is needed.biofuels, economic development, food security, poverty, Africa

Implementing Rural-Urban Disaggregated Food Demand in a Partial Equilibrium Model

Global general and partial equilibrium models focused on the agricultural sector can help policy makers do ex-ante analysis by providing a variety of macro-level outcomes, such as changes in flows of international trade, and changes in the supply, demand, and prices of globally traded commodities. IFPRI’s IMPACT model (International Model for Policy Analysis of Agricultural Commodities and Trade) model is one such model. Since its inception nearly 20 years ago the model has evolved to inform increasingly complex and nuanced policy issues, such as the explicit modeling of water use and the productive response of agriculture to climate change. However, on the demand side it has remained a fairly blunt instrument. One oft mentioned shortcoming of global food policy models such as IMPACT model is that they treat national populations as a single composite consumer. As (relatively) wealthier urban and poorer rural populations exhibit different demand characteristics, have different base levels of food consumption, and have different levels of wealth, assigning a single representative consumer for an entire country could result in misleading results regarding both global prices and consumption and the food security of the poorer segments of the population. In this poster we present a global partial equilibrium food security model with disaggregated demand. Working from the IMPACT model, we divided national populations into their urban and rural components. Studies have shown that rural and urban consumers, as well as poor and rich consumers, have structurally different food demands. Accordingly, we assign different demand elasticities (price and income), different base consumption (at the commodity level), and different incomes to sub-populations populations within each country.  We have completed an extensive study of the food demand literature, using the findings to develop parameters to represent the structural differences in urban and rural food demand (see right for explanation of this process). We use rural/urban population and income data and projections from the UN to complete the disaggregation.Partial Equilibrium Models, Disaggregated Food Demand, IMPACT model, Food Security, Agricultural and Food Policy, Demand and Price Analysis, Food Security and Poverty,