Journal of Development Economics 98 (2012) 228–237

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Journal of Development Economics

j o u r n a l h o m e p a g e : w w w. e l s ev i e r. c o m / l o c a t e / d eve c

Social contracts, markets and efficiency: Groundwater irrigation in North India

A. Banerji a, J.V. Meenakshi a,⁎, Gauri Khanna b
a
Delhi School of Economics, University of Delhi, India
b
World Health Organization, Geneva, Switzerland

a r t i c l e i n f o a b s t r a c t

Article history: This paper uses primary data to analyze the institutions and informal markets that govern groundwater
Received 26 December 2009 allocation in a sugarcane-cultivating village in North India. We find that, in contrast to earlier literature, the
Received in revised form 27 July 2011 observed water trades result in efficient water allocation across farms. We interpret this and other stylized
Accepted 28 July 2011
facts in terms of a social contract using a simple bargaining model with limited inter-player transfers. Poor
functioning of the power sector leads to reduced pumping and a water supply constraint. Simulations show
JEL classification:
L1
that power supply reform can significantly increase farm yields, and be financed out of increased farm profits.
Q1 © 2011 Elsevier B.V. All rights reserved.
Q2

Keywords:
Water markets
Market structure
Social contracts
Water pricing

1. Introduction Next, based on our characterization of the water transactions in

India's successful agricultural growth over the past few decades
has been accompanied by the popularity of water intensive crops
(such as rice and sugarcane) and an expansion of groundwater
irrigation. Decreasing groundwater tables in several areas have raised
concerns about the efficiency and sustainability of groundwater use in
agriculture. In turn, this has given rise to a debate on whether market
institutions for water engender optimal and/or equitable water
allocations, and relatedly, on the role of the widely prevalent system
of flat-rate (lump sum) electricity pricing in contributing to inefficient
water use in agriculture.
These concerns provide the backdrop for the present study, which
characterizes the institutions that govern water allocation in a village
setting with relatively deep water tables, and draws inferences for the
design of instruments that may facilitate efficient water use. In
particular, we examine whether the informal water markets that
operate in this village economy are monopolistic in nature and
therefore lead to inefficient outcomes, as is argued in much of the
literature. We conclude that the water trading that we observe is
better viewed as part of a social contract; and that this contract results
in a spatially-efficient allocation of water.
⁎ Corresponding author.
E-mail addresses: a.banerji@econdse.org (A. Banerji), meena@econdse.org
(J.V. Meenakshi).
this village, we use simulations to analyze the impact of different
electricity pricing regimes on yields and on the profits of the power
supplier. We find that policy reform in the power sector can
significantly improve crop yields by allowing farmers to control the
volume of irrigations. Thus we argue that the policy focus should shift
from water allocation within villages to policy reform in pricing and
delivering electricity that powers groundwater extraction.
The paper is based on primary data collected in a village located in
the sugarcane belt in Western Uttar Pradesh (UP), India. The survey
was carried out over the entire ten-month crop-cycle in 2004–05.
While details are set out in subsequent sections, we provide here a
brief preview of our results. We find:
(i) Direct evidence that power shortage rations water supply.
(ii) The water shortage results in the marginal value product of water
(MVPW) on tubewell owners' plots being significantly higher
than the water price they get from selling water. A water price-
taking, profit-maximizing tubewell owner should then prefer, on
the margin, to add water to his own plots rather than sell water.
(iii) Yet, tubewell owners sell significant quantities of water. We
conclude that models that treat tubewell owners as profit-
maximizing water-selling ‘firms’ are an inadequate description
of the sugarcane belt of North India. Instead, we infer, and
model, the existence of a social contract, that determines both
water price as well as water allocation across plots in the
village.

0304-3878/$ – see front matter © 2011 Elsevier B.V. All rights reserved.
doi:10.1016/j.jdeveco.2011.07.005
 A. Banerji et al. / Journal of Development Economics 98 (2012) 228–237
(iv) The social contract results in a spatially-efficient allocation of
water: that is, reallocating the available water across plots
would not increase output significantly. This is a striking result,
standing in sharp contrast with much of the literature, such as
Jacoby et al. (2004), Meinzen-Dick (1996), and Shah (1993),
which has tended to find allocative inefficiency and attributed
it to the presence of monopoly power of tubewell owners.
(v) However, notwithstanding the social contract, inadequate power
extracts a toll. Through simulations we show that in the presence
of adequate electricity, simulated yields are up to 9% higher than
sample yields. Inadequate power supply is largely a consequence
of the present system of a flat electricity charge unrelated to the
quantum of electricity used. We find that unit pricing to cover the
marginal cost of power is more expensive, but the reliable power
supply that results induces increased yields and farm profits that
can more than pay for such pricing.
Since the focus of the present paper is on static efficiency, the
potentially important effect of reliable power supply on aquifer
depletion is not analyzed. 1
This study contributes to the substantial literature that examines
questions of groundwater market structure, water allocation and
attending issues related to efficiency and equity in South Asia, which
includes, in addition to Jacoby et al. (2004), Meinzen-Dick (1996), and
Shah (1993) cited above, Aggarwal (2007), Dhawan (1995), Dubash
(2002), Foster and Rosenzweig (2008), Foster and Sekhri (2008),
Meinzen-Dick (2000), Palmer-Jones (1994), Sengupta (2000), and
Somanathan and Ravindranath (2006).2 These studies span a large and
diverse content. One major distinction of the present paper is the
modeling and empirical support found for the existence, and efficiency of
a social contract that governs water transactions, and the possibly wider
connotations for the nature of local institutions. The structural estimation
that enables us to quantify the extent of water misallocation and simulate
alternative policy environments is also scarce in the literature. The
literature however brings out the vastness and diversity of the water
economies present in India: see for instance Foster and Sekhri (2008),
which studies Eastern UP, an area with markedly different hydrogeology,
water markets, and policy implications as compared to Western UP.
The rest of the paper is organized as follows. Section 2 describes the
study area and the data. Section 3 analyzes the water allocation across
plots observed in the data, and provides evidence of widespread water
rationing. It then argues that observing water sales in the presence of
such rationing points to the existence of a social contract governing
water transactions. Section 4 proposes a simple model of this social
contract, which predicts, among other things, that water allocation
across plots will be efficient. Section 5.1 analyzes the data to show that
allocative efficiency is a good approximation of the village water
economy. Section 5.2 discusses simulations that quantify the effect of a
comprehensive change in power policy involving unit-pricing of
electricity. Section 6 concludes.
2. Data and stylized facts of the study area
2.1. The sample
Our analysis is based on a detailed village-level survey we
conducted over the course of 10 months. Our study site is a village
in Baghpat district, selected from a ‘dark’ block 3 in the sugarcane belt
of Western Uttar Pradesh, with water depth at 55 ft.
1 4
See Banerji, Meenakshi and Khanna (2006) for a discussion of intertemporal
efficiency in this context, and Shah et al. (1993) for a general discussion of this issue.
2
See Schoengold and Zilberman (2007) for an excellent survey on the economics of
water.
3
Dark blocks are defined as areas where the quantum of groundwater used exceeds
85% of recharge.
229
Table 1
Summary statistics on water use and yields.
Plots irrigated with own Plots using purchased
tubewell water
Number of plots 240 86
Yields (quintals per bigha) 59 (15.9) 53 (16.3)
Mean volume of irrigation 30 (9.1) 22 (7.7)
(bigha inches per bigha)
Note: Figures in parentheses refer to standard deviations.
1 bigha = 0.2 acres; 1 quintal = 100 kg.
The village has 165 cultivating households, all of whom cultivate
sugarcane using groundwater. The crop is irrigation intensive,
requiring one irrigation pre-sowing, and regular irrigations thereafter.
Our data consists of a random sample of 73 tubewells out of a total of
110, and all 326 plots that are served by them; these plots belong to
105 farmers. Data were collected for the tubewells (including
borewell depth, tubewell discharge, type, number of breakdowns
and repair costs); for the plots (including physical inputs and outputs,
input and output prices, soil quality, location of plot), and for the
households. Field visits were made every 2 weeks over the entire
annual sugarcane cycle (Appendix A.4 provides further data collection
details).
2.2. Principal features of the study village
The social contract and the type of water transactions that we
observe are driven primarily by three institutional features:
2.2.1. Irregular power supply
The village is subject to erratic power supply. Power supply averaged
6–7 h in May, 8–10 h in June and 3–5 in July. In a year with no rain in
these months, there was too little electricity to administer irrigations to
all plots at the desired frequency (once every 20 days in these early plant
growth months). This had significant consequences for cultivation since
all 73 tubewells in our sample ran on electricity; the water table depth
making it uneconomical to use diesel to fuel the pumps. The tubewells
varied in the technology employed to lift water: in particular, 29 of the
pumpsets were submersible and the rest were non-submersible. 4
Submersible pumps are much more expensive to purchase but are the
desired technology for areas with low water tables. They also have
higher discharge (the average submersibles take two-thirds of the time
that centrifugal pumps take to irrigate a given area), and are less prone
to breakdowns. The costs of operating tubewells include an annual
charge of Rupees 70 per month per horsepower, and maintenance costs.
2.2.2. Fragmented holdings and water transactions
A common feature of the village is the fragmentation of farmers'
holdings. There are about 3.2 plots per farmer; these are typically
located in 2 (and sometimes more) non-contiguous fragments. Farmers
generally do not install tubewells on all of their plots and as a
consequence participate on both sides of the water market. In our
sample, approximately 10% of farmers did not trade water – neither
bought nor sold – and relied on their own tubewells for irrigation. Of the
remaining 90%, over two-thirds both purchased and sold water, one-
sixth only sold water, and about the same only bought water. About half
of the farmers that bought water also irrigated other plots using their
own tubewells. As shown in Table 1, plots which relied on purchased
water received less irrigation. Tubewells are typically installed on the
A submersible pump has a hermetically-sealed motor, is submerged in the water,
and has a greater lifting force as it does not rely on external air pressure for lifting
water. Non-submersible (centrifugal) pumps have lower discharge, and are not able to
lift water from great depths. The variant of these pumps that operate in this area are
‘jet’ pumps, whose jet assemblies are within the well in order to enable the pumps to
operate at the moderate depth of water (55 ft) in this area.
230 A. Banerji et al. / Journal of Development Economics 98 (2012) 228–237

farmer's largest plot: in our sample, the average plot size for plots with Table 2
tubewells at 12 bighas, is nearly double the area of plots with no Summary statistics of other inputs and output variables (326 observations).

tubewells. Bigha is the local measure of area, and equals about one-fifth Variable Mean Standard deviation Min Max
of an acre, and is the measure we use in this paper.
Output (quintals) 443 430.16 30 4000
Plot area (bighas) 7.5 6.21 1 50
2.2.3. Uniform price of water Labor (hours) 1302 1189.12 178 9190
A water price is set (in Rupees per hour) at the beginning of the Tractor (hours) 7.9 22.15 Neg 200
Oxen (hours) 86.4 99.62 Neg 568
season as a result of a social consensus, and holds for all water Irrigation (bigha-inches) 222.5 208.59 5.2 1330
transactions in the village. This price does not vary across the season
Conversion: 1 bigha = 0.2 acres. 1 bigha-inch = 20.6 cm3.
in response to varying power (and therefore water) availability, to
clear the market. Consequently, water selling farmers can only adjust
the quantity of water sales over the season. This uniformity of water water input on the plot; to determine whether rationing is significant,
prices and informal social contract has been noted elsewhere; for we derive a confidence interval around the MPW using the Delta
example by Dubash (2002) for Gujarat, and Srivastava et al. (2009) for method. Separately, we estimate the unit cost of water extraction
Central Uttar Pradesh. from each tubewell.
As we demonstrate in Section 3, despite evidence that water is
rationed, the social contract translates into substantial water sales, a 3.1. Estimating the sugarcane production technology and unit costs of
stylized fact that appears to apply to other areas as well. Srivastava water extraction
et al. (2009) note that “Given … the relative shortage of water (due to
paucity of electricity) tubewell owners wanting to maximize profits The problems associated with estimating a production function
from water sales could choose to sell little water, using most of it on based on a single cross-section, as is the case here, are well-known. 6 In
their own plots….They sell substantial volumes of water, even though our case, estimation is facilitated by the considerable variation in
it would make better economic sense to use the water to boost the inputs across plots, owing to variation in plot sizes, among other
productivity of their own land” (p. 96). factors. Also as farmers in the data set have multiple plots, we use
We calculate the price of water per unit volume charged by a farmer dummies to deal with identification problems caused by
tubewell by dividing the village water price of Rupees 15 by the unobserved, farmer-specific shocks, and include plot-specific soil
measured volume of water that the tubewell discharges per hour. We quality variables to control for soil fertility impacts on output. We
measure irrigation volume in terms of bigha-inches, which is estimate the equation
approximately 20.6 m 3 of water. The average price per bigha-inch of

water across all tubewells is Rupees 6.50. 5 yij = f xij ; β bj εij ð1Þ

2.3. Summary statistics
Table 1 summarizes yields of sugarcane by category of plot, to
examine whether the differential irrigation volumes are reflected in
yields. As one might expect given the summary statistics on irrigation,
yields are lower on plots with purchased water but the differences are
not substantial.
Summary statistics for the other major inputs are presented in
Table 2. With labor, all activities are summed across by type of activity
(land preparation and sowing, weeding and digging, applications of
irrigation and other inputs, tying of cane, harvesting) and by type of
labor (hired casual labor and permanent labor, contractual labor,
household labor, labor in exchange and other miscellaneous forms). In
addition to input use data, we collected soil samples from each plot,
and had them analyzed for ten quality characteristics.
3. Evidence of water rationing
We investigate two questions related to the water allocation across
plots observed in our sample — whether water is rationed (this section),
and whether its allocation across plots is inefficient (Section 5).
Since the price of water is fixed through the season, and electricity
for pumping water is in short supply, it is possible that there is
quantity rationing of water on plots. A water buying plot i is defined to
be water rationed if its marginal value product exceeds the marginal
cost of water extraction: i.e. if ps âi > ĉt , where ĉt is the estimated
unit cost of water extraction for the tubewell supplying plot i, ps is the
sugarcane price, and âi is the estimated MPW (marginal product of
water) for the plot.
We estimate plot-level marginal product of water as the partial
derivative of an estimated production function with respect to the
5
By way of comparison, this is a little greater than half of the average water price
that Somanathan and Ravindranath (2006) estimate for water transactions in the
Papagni watershed in the southern states of Andhra Pradesh and Karnataka.
where bj is a farmer j-specific shock unobserved by the econometri-
cian (farmer j cultivates plot i), which we can estimate using a dummy
for farmer j; yij, xij, εij are, respectively output, a J-dimensional input
vector (of which the Jth input is water), and error on plot i, cultivated
by farmer j and β is a J-dimensional parameter vector. We
experimented with several functional forms, including the flexible,
Translog function. We found that the Cobb–Douglas production
function nested by the Translog works best (the null that the
higher-order terms are all zero cannot be rejected). 7 Our production
model is therefore

 J
 T−1
ln yij = ∑ βkln xijk + ∑ γj dj + λdc + uij ð2Þ
k=1 j=1
where i indexes plots, j indexes farmers, ln(xij1) = 1, for all i, dj = 1 if
plot i is cultivated by farmer j, and is zero otherwise; dc equals 1 if plot
i has a rattoon 8 crop. The explanatory variables xik are plot size, labor,
tractor and oxen hours, and irrigation volume. Since fertilizer and
6
See Griliches and Mairesse (1998), Levinsohn and Petrin (2003), Marschak and
Andrews (1944) and Olley and Pakes (1996) on identification of production functions.
Any production function estimation is susceptible to endogeneity, as the right-hand
variables are objects of choice; these choices can depend on unobserved farmer-
specific and plot-specific characteristics and thus be correlated with the error term.
Multiple plots per farmer enable us to control for the former with a farmer-specific
fixed effect. We also have detailed plot-specific soil quality data to control for the
latter. In our empirical work, we experimented with different instruments for various
inputs and found that they did not significantly change the values of the parameters
(particularly of water). Water prices are too weakly correlated with irrigation volumes
to serve as effective instruments. This last fact probably arises because under water
rationing, the social contract allocates water efficiently across plots; so plots with
different water prices can end up with similar irrigation volumes.
7
We also considered the von Liebig production function that often works well in
plant experiments (e.g. Paris and Knapp, 1989). However, the von Liebig implies a cost
function linear in input prices. This is rejected by our data, so we did not estimate this
form of production function.
8
Rattoon refers to a second year stalk from planted sugarcane, grown by leaving the
roots and part of the stalk intact in the soil during the first harvest.
 A. Banerji et al. / Journal of Development Economics 98 (2012) 228–237 231

Table 3 Table 4A
Cobb–Douglas production function estimates with farmer fixed effects. Estimates for marginal value product of water (MVPW) (incremental Rupees per
incremental bigha-inch), with 95% confidence intervals; water price (Rupees per Bigha-
Output Coefficient Standard error inch).
Plot area 0.745** 0.0458
Variable Observations Mean* (in Rupees) Std. dev. Min Max
Labor 0.045* 0.028
Fertilizer–manure principal component 0.028** 0.012 MVPW 326 24.4 14.2 6.9 130.9
Tractor 0.101** 0.019 Conf. int: R 326 25.8 16.5 7.1 175.0
Oxen 0.121** 0.021 Conf. int: L 326 23.1 12.2 6.7 130.7
Irrigation 0.108** 0.03 Water price 326 6.5 2.1 2.8 13.6
Crop dummy (1 = rattoon) 0.474** 0.043
*: After dropping 2 outliers. Conf. int. L and R are left and right endpoints of confidence
Soil quality first principal component − 0.0002 0.0001
intervals. 1 bigha-inch = 20.6 cm3.
Soil quality: second principal component −0.0002 0.0002
Constant 2.691** 0.193

Other information on the Cobb–Douglas Estimation: variables are in logs. Number of

Observations: 326; F = 385; R-squared = 0.945; Adjusted R-squared = 0.943. * and **
denote 10%, and 5% levels of significance. Table 4B
Mean marginal value product of water by plot type.

Plot type Mean MVPW Confidence interval R Confidence interval L

manure were correlated, we use the first principal component of these
inputs in the regression. Also, to control for plot-specific quality, we
took the first two principal components of the vector of 10 soil quality
characteristics (including pH, conductivity, concentration of zinc,
manganese and other similar soil micronutrients).
Table 3 presents the Cobb–Douglas production function estimates,
where the standard errors have been corrected to account for
correlation across plots cultivated by the same farmer. All coefficients
have the expected sign and are significant. 9
The unit cost of water extraction from a tubewell does not depend on
a charge for electricity, as that is a lump sum annual charge. But it
depends on the number of pump breakdowns and the cost of repair per
breakdown, since the number of such breakdowns is a function of the
number of hours of tubewell operation. We model the number of pump
breakdowns as a Poisson process; we estimate the Poisson parameter
from data on hours of operation and number of breakdowns for each
pump. From this we derive tubewell-specific marginal cost of water
extraction estimates, as detailed in Appendix A.1.
3.2. Comparing MVPW on plots to unit costs of water extraction
Table 4A presents summary statistics of the derived plot-level
estimates of MPW, and the confidence bands. For the sample overall,
the average MVPW (the MPW times the sugarcane price of Rupees
102 per quintal) is about Rupees 24.4 per additional bigha-inch of
water. On the other hand, the estimated Poisson parameters for non-
submersible and submersible pumpsets, respectively 0.002 and
0.0005, (standard errors 0.00006 and 0.0001 respectively), yield
marginal costs of extraction that average Rupees 1.45 and Rupees 0.3
per bigha-inch for the two pumpset types. Comparing the confidence
interval on MVPW on each plot with the confidence interval on the
marginal cost of extraction from the tubewell that supplied water to it,
we find that there is no overlap; the former is greater than the latter
for every plot. Thus there is pervasive water rationing. 10
Given this rationing, a comparison of the MVPW for each plot with
the tubewell-specific water price (Rupees 15 divided by the tubewell
discharge per hour) for the plot strongly suggests the existence of a
social contract determining water allocation. The mean MVPW is well
above 3.5 times the mean water price of Rupees 6.53 per bigha-inch;
in fact, the MVPW is significantly larger than the water price for 308 of
the 326 plots. A tubewell-owning farmer who both sells water and
9
We also experimented with alternative specifications that included a variable that
captured the role of timing of irrigation; this was not significant and did not greatly
affect other estimated coefficients, suggesting that the estimated MPWs are robust.
10
Switching to diesel since electricity supply is short is not economical at this depth
(50–60 ft). A simple calculation suggests that at the 2005 diesel price of Rupees 26 per
liter, it would cost about Rupees 52 to extract 1 bigha inch of water, which is more
than double the average MVPW. Singh and Singh (2003) note that for the district of
Meerut, diesel is 4 times more expensive than electricity.
Own tubewell 22.1 23.2 21.0
Buy water 32.2 34.5 29.9
Conf. int. L and R are left and right endpoints of confidence intervals.
irrigates his own plots as well, who takes the village water price as
given, and allocates water to maximize profits would sell any water at
all only after the MVPW on his own plots equals the water price. The
data show, instead, that MVPW on own plots is higher than the water
price; despite this, there are pervasive sales of water. 11
4. A simple model of the village social contract
This motivates the simple model of the social contract, which takes
into account the stylized facts discussed earlier: (i) electricity supply is
irregular leading to water rationing; switching to diesel is uneconom-
ical; (ii) farmers cultivate multiple fragments, with tubewells on larger
plots and purchasing water for smaller plots; and (iii) a uniform water
price is agreed upon in the village at the beginning of the season, and
there are substantial water sales.
We model the social contract as a village-wide bargaining over water
allocation across plots and water price. Water allocation affects outputs
and profits on each plot, and thus the size of the total village ‘pie’; while
payments for water use result in a division of this pie across the farmers.
In the village, who buys water from whom depends on plot locations,
and this generally does not include reciprocal buyer–seller relationships
between pairs of farmers. Rather, farmer A may be buying water from
farmer B, who may be buying from farmer C, and so on; so village-wide
bargaining captures negotiations better than bargaining within small
groups of farmers. To do this, we apply the N-player Nash Bargaining
model. 12 This is a well-known model, that enables us to explicitly map
our village level features on to it, so as to provide predictions about
11
Plots with own tubewells are relatively less water-rationed. Table 4B shows that
the mean MVPW for plots with own tubewell is Rupees 22.1, while for plots irrigated
using purchased water it is Rupees 22.1. While the recent finding by Anderson (2011)
suggests that caste plays a significant role in water transactions in eastern India, the
caste composition in our study village (as in a subset of those reported in Anderson) is
relatively homogenous. Our census indicated that 80% of farmers were Jat, and an
additional 8% were Gadaria, both of which are backward (but not scheduled) castes
(Pant, 2004; www.ncbc.nic.in accessed on January 24, 2011).
12
Lensberg (1988) and Nash (1950). Several non-cooperative bargaining models
approximate the Nash Bargaining solution (e.g. Krishna and Serrano, 1996), so its use
can be viewed as describing the outcome of an explicit bargaining process. The N-
player version of Nash Bargaining ignores the possibility of the formation of coalitions
of players, but in our setting, appears to capture village-wide agreement in a simple
way.
232 A. Banerji et al. / Journal of Development Economics 98 (2012) 228–237

water allocation that we should expect if the model is a reasonable Substituting this in the objective function of Eq. (3), the problem
approximation of village negotiations. Also, the only transfers farmers becomes
make to each other is through payments for water use, at a single, " #
common water price. It is useful to show how this affects the Pareto N



 
Maxðwjj ;wj+1; j Þ ∑ Ajj f wjj + Aj; j−1 f wj; j−1 −c wjj + wj+1; j −πj :
frontier and utility possibilities that farmers can attain. As discussed j j=1

earlier, in our data, two-thirds of farmers are both water buyers and
ð5Þ
water sellers; a sixth only sell water, and of the remaining sixth that buy
water, half are tubewell owners. For simplicity, we discuss a setting in
Rearrange Eq. (5) to have the entire water allocation from
which all farmers buy as well as sell water. Relaxing this does not affect
tubewell j ‘visible’:
the essential implications; we demonstrate this using a simple example
in Appendix A.2. N



 
Suppose there are N farmers, and N ‘locations’. Farmer j has 2 Maxðw ;w Þ ∑
jj j+1; j j
Ajj f wjj + Aj+1; j f wj+1; j −c wjj + wj+1; j −π j :
j=1
plots, in locations j − 1 and j; so at each location j, there are 2 plots,
owned by farmers j and j + 1 (modulo N). 13 Farmer j has a tubewell ð6Þ
on his plot in location j but not on his plot in location j − 1, and his
own tubewell is too distant to serve this latter plot. So for each j, The first order conditions for an interior optimum are:
irrigation on the 2 plots at location j depends on farmer j's tubewell.


The particular choice of number of plots and pattern of plot Ajj f ′ wjj = c; Aj +1; j f ′ wj+1; j = c; ∀j: ð7Þ
ownership is purely for simplicity; it implies that water transactions
generate a circle of interaction: Farmer 1 sells water to farmer 2, who
That is, the MVPW on each plot equals the unit cost of water
sells to farmer 3, and so on to farmer N. The unit cost of water
extraction; every point on the Pareto frontier of farmers' profits
extraction is c (for simplicity constant across tubewells). Crop output
corresponds to agreements with the same, efficient water allocation
depends on water input (w) alone (for simplicity): farmer j's outputs
described by Eq. (7). 14 But the data in Section 3.2 show that MVPW
on his 2 plots are Ajjf(wjj) and Aj, j − 1f(wj, j − 1) respectively. (The first
greatly exceeds the unit cost of extraction on each plot; so, an
subscript refers to the farmer and the second to the location of the
appropriate model of a social contract in the village must take into
plot; for example, wj, j − 1 is the amount of irrigation on farmer j's plot
account the fact that limited power supply rations the amount of
in location j − 1; Aj, j − 1 is a plot-specific productivity.) f is twice
water available.
continuously differentiable, strictly concave, with positive first
derivative; and water is an essential input. Let the sugarcane output
4.2. The social contract under water rationing
price be normalized to 1, and let p denote water price.
(wjj, wj+1, j)jN= 1, or simply (wjj, wj+1, j)j, will refer to a water
Suppose that the discharge from tubewell on plot j is constrained
allocation in the village; the expression within parentheses gives
to be at most wj ; j = 1; …; N. If wjj, wj + 1, j, the solutions to Eq. (7)
the water supplied by tubewell j to the plots of farmers j and j + 1 in
above, add up to a number greater than wj , plots will be water-
location j, An agreement will be a tuple (p, (wjj, wj+1, j)j) consisting of a
rationed; this is the case suggested by the data. To simplify some
water price p and a water allocation that all farmers agree upon. Every
expressions (for the disagreement point in Nash Bargaining), we
feasible agreement gives each farmer a specific level of profit;
make a stronger assumption.
(‘feasible’ water prices and water allocations will be defined later).
 
Assumption R. Ajj f ′ wj > c; ∀j = 1; …; N. That is, even if the entire
4.1. Water allocation in the absence of rationing amount discharged by tubewell j is applied to farmer j's plot at that
location, the MVPW on the plot exceeds the unit cost of water
We first show that in the absence of a (power shortage driven) extraction. In the absence of an agreement of water price and water
water constraint, the water allocation in the Nash Bargaining solution allocation, farmer j therefore gets a ‘disagreement’ profit dj =
 
would equate the marginal value product of water on each plot with Ajj f wj −cwj (since without getting any water on his plot in location
the marginal cost of water extraction. The Nash Bargaining solution j − 1, its output is 0).
picks a point on the Pareto frontier of farmers' profits. To deduce the The Pareto frontier of the set of profit possibilities is now
water allocation, it suffices to characterize the Pareto frontier. Let S be characterized by:
the set of all feasible agreements. The Pareto frontier would be
described by the solution to the problem which maximizes farmer 1's Max
 A f ðw Þ + A f ðw Þ + pw −pw −cw
11 11 1N 1N 21 1N 1
p;ðwjj ;wj+1; j Þj ∈S
profits holding fixed the profits of the other farmers:
s:t:



Max
 A11 f ðw11 Þ + A1N f ðw1N Þ + pw21 −pw1N −cðw11 + w21 Þ Ajj f wjj + Aj; j−1 f wj; j−1 + pwj+1;j −pwj;j−1 −cwj = π j ; ∀j = 2; …; N
p;ðwjj ;wj+1; j Þj ∈S
s:t: ð8Þ




Ajj f wjj + Aj; j−1 f wj; j−1 + pwj+1; j −pwj;j−1 −c wjj + wj+1; j = π j ;
and wjj + wj+1; j = wj ; ∀j = 1; …; N: ð9Þ
for all j = 2; …; N:
ð3Þ Here, the set S of feasible agreements consists of tuples of non-
negative water price and water allocations that do not exceed the
Adding the constraints in Eq. (3), we get water available from each tubewell, and that result in each farmer's
profit being at least as large as his disagreement profit. It follows from
N h


 i
Assumption R that all available water is utilized; so the constraints in
∑ Ajj f wjj + Aj; j−1 f wj; j−1 −c wjj + wj+1; j −π j ð4Þ
j=2 Eq. (9) hold with equality. Carrying out the same operations that
+ pw1N −pw21 = 0:
14
If some tubewell owners have tubewells on all plots, they may choose not to
participate in the water market, under some conditions. Our simple setting in which
all farmers have some plots without tubewells precludes a more formal discussion; but
13
That is, N + 1 refers to farmer 1. see Appendix A.2.
 A. Banerji et al. / Journal of Development Economics 98 (2012) 228–237
helped rewrite Eq. (3) in the form of Eq. (6), the above maximization
problem can be posed as:
N


 
Maxðw ;w Þ ∑ Ajj f wjj + Aj+1; j f wj+1; j −cwj −πj
jj j+1; j j
j=1
s:t: wjj + wj+1; j = wj ; ∀j = 1; …; N:
The first order conditions imply



0 0
Ajj f wjj = Aj+1; j f wj+1; j ; ∀j = 1; …; N:
That is, water in each location j is allocated to equate MVPW on the
plots in that location. Let this efficient water allocation be denoted
(wjj*, wj+1,
* j )j. Every point on the Pareto frontier of farmers' profits
therefore arises from this common, efficient water allocation (efficient
subject to the water constraints). We now describe the Pareto frontier
fully, followed by the Nash Bargaining solution for the problem.
Farmer j's profit at the efficient allocation is equal to




   
πj = Ajj f wjj + Aj;j−1 f wj;j−1 −cw + p wj + 1;j −wj;j−1 = πj + psj
j
where sj equals his net water sales at the efficient water allocation,
and πj0 is his profit at this allocation, if the water price equals zero. The
(asymmetric) Nash Bargaining solution is a tuple of farmers' profits
(π1nb, …, πNnb) that solves

α
N j
Maxðπ1 ;…;πN Þ∈Θ Πj = 1 πj −dj
where αj is the bargaining power of farmer j, Θ is the set of all profit
tuples (π1, …, πN) that lie on the Pareto frontier and satisfy πj ≥ dj, ∀ j.
Regardless of bargaining power, the model provides an interval [m,
M] within which the negotiated water price will lie. Let NB = {j|sj b 0},
NS = {j|sj ≥ 0} be the subsets of farmers that are respectively net buyers
and net sellers of water, at the efficient water allocation. For a water
price to be feasible, it must be non-negative, and satisfy πj0 + psj −
dj ≥ 0,∀ j. For feasible water prices to exist, it must be that for all net
water buyers, πj0 − dj > 0. We have that, at the efficient water allocation,
the set of feasible water prices is the closed interval [m,M], where15
n
 o n n
 oo
0 0
M = min − πj −dj = sj j j∈NB ; m = max 0; max − πj −dj = sj j j∈NS :
So a water price p > M implies that some net water buyer (at the
efficient water allocation) is better off at his disagreement payoff than
on agreeing to this price. Similarly, p b m means that some net water
seller (at the efficient water allocation) is better off at his
disagreement payoff than on an agreement at this price. Therefore,
the Pareto frontier of farmers' profits is given by:
n
 o
0 0
Θ = ðπ1 ; …; πN Þ = π1 ; …; πN + pðs1 ; …; sN Þj p∈½m; M  :
This is a line segment through the point (π10, …, πN0 ), in the direction
of (s1, …, sN), the net water trades of the farmers. 16 The Nash Bar-
gaining objective function (Eq. (13)) is continuous on the compact set
Θ, so a maximum exists; it is unique because the objective is strictly
quasiconcave. Thus, there is agreement on a unique water price
15
We assume m b M : this always holds if πj0 − dj > 0, ∀ j.
16
In usual N-person Nash Bargaining problems of dividing a fixed pie, the Pareto
frontier is an N − 1 dimensional simplex; here, it is just a line segment because the
only transfers possible between farmers are through the water price and water trades.
233
p ∈ [m, M]. 17 Note that this water price p agreed upon has no simple
relationship with the unit cost of water extraction. Thus the literature
that uses price–cost margins to infer about allocative efficiency of
water may be misleading.
ð10Þ In principle, determining the interval [m,M] that traps the water
price for our village would require a census of water trades. We
approximate it using our sample data on tubewells. For all net water
sellers in the sample, profit net of disagreement payoff (πj0 − dj) is
positive; so all non-negative water prices result in profits at least as
large, and are feasible. Thus m = 0. On the other hand, for the net
ð11Þ
water buyers, the quantities − (πj0 − dj)/sj have 3 outliers at 6.3, 6.4
and 10.1, and thereafter all lie above 20. Thus a reasonable guess for
the interval is [0,20]; and the observed water price of Rupees 6.5 per
bigha inch indeed lies in this interval.
5. Implications of the social contract
Another key implication of our model is that water allocation
across plots served by a tubewell is efficient. Do our data validate this?
0
5.1. Allocative efficiency
ð12Þ
To examine this we ask the following question:
What would the outputs from the sample plots be if the total observed
water from each tubewell in the sample is allocated efficiently across the
plots that are serviced by that tubewell?
Suppose for every plot i the choice (xij) of inputs other than irrigation
ð13Þ has been made as in the data. Suppose the constant marginal cost of
water extraction from tubewell t is ct, and let U(t) be the set of all plots in
the sample that are serviced by tubewell t. Let wt be the total volume of
water discharged from
  tubewell t: this is given from the data. An
efficient allocation x̂iJ i∈U ðtÞ of water would be a vector that maxi-
    
mizes ∑ ps f xij ; x̂iJ ; β −ct x̂iJ , subject to the constraints
i∈U ðt Þ
∑ x̂iJ ≤wt ; and for all i∈U ðt Þ; x̂iJ ≥0: ð16Þ
i∈U ðt Þ
The constraint ∑ x̂iJ ≤wt captures the water shortage implied by
i∈U ðt Þ
limited electricity supply. Note that at the solution, MVPW will be
equated across plots. We solve this problem, evaluated at the
estimated parameter vector β̂ and estimated production function
ð14Þ and unit cost of water extraction, f, and ĉt respectively, for each
tubewell in the data set. Then we compare the total simulated output
with the total output in the sample.
Note that the mapping from tubewells to user plots stays the same
as in the sample; 18 given that water is transported through unlined
water channels, this mapping is largely determined by proximity of
plots to particular tubewells.
As indicated in Table 5, redistributing water results in an average
gain of 0.2 quintals per bigha (0.4% of the sample average), with the
ð15Þ highest gain of about 1 quintal per bigha (2% of sample average) on plots
which purchase water. We infer that the social contract appears to work
extremely well, allocating water efficiently across plots, minimizing
losses in overall yields in the face of water rationing. An alternative
simulation (not reported) in which we permit water reallocation across
all plots (rather than across plots serviced by a common tubewell) leads
to an increase in average yield of about 0.4 quintals per bigha. Thus even
17
The presence of multiple locations across which water is not transported could in
principle also be analyzed by a model where different water prices are negotiated in
different locations. However, this is not what we find in our village; we find a uniform
village-level price and this is what our model explains.
18
So each plot serviced by the same tubewell faces the same marginal cost for water.
Given water rationing, choosing a water allocation to maximize joint profits for these
plots is the same as maximizing joint output.
234 A. Banerji et al. / Journal of Development Economics 98 (2012) 228–237

Table 5 Table 6
Simulation results on impact on yields from sample plots if the total observed water Simulation results on effect of unit power price on yields, irrigation volumes, profits,
from each tubewell in the sample is allocated efficiently across the plots that are and power revenue.
serviced by that tubewell?
Power price Yield Profits Irrigation volume Power revenue
Plot category Sample yield Simulated change Simulated change
(Sample: zero 58.22 2490.6* (2220.6) 28.2 270.3* (540.3)
(average) (yield) (value)
unit price)
All plots 58.22 +0.20 +20.40 2.0 64.1 2814.5 37.7 462.5
Plots with single-owner TW 59.17 − 0.06 − 6.12 2.3 63.6 2743.0 36.3 505.5
Plots that bought water 53.58 +1.01 +103.0 2.6 63.1 2675.3 34.7 539.4
2.9 62.6 2611.7 33.0 563.9
Yield = quintals of sugarcane per bigha; value = Rupees per bigha; sample area = 2350
3.2 62.1 2552.2 31.3 583.6
bighas. TW = tubewell.
3.5 61.5 2496.5 29.6 596.4
Conversion: 1 quintal = 100 kg. 1 bigha = 0.2 acres.
3.8 61.0 2444.5 27.9 606.7
4.1 60.5 2395.7 26.4 614.6
4.4 60.0 2349.8 25.0 620.1
though the plot level MPW estimates are significantly different from
Units: Power price: Rupees per kilowatt hour; yield: quintals per bigha; profits: Rupees
each other, in fact the extent of allocative inefficiency is strikingly
per bigha.
little. 19 Irrigation volume: bigha-inches (per bigha); power revenue: Rupees per bigha.
1 bigha = 0.2 acres; 1 bigha-inch = 20.6 cm3. The sample profits and power revenue per
bigha are starred, as profits are higher and power revenue lower due to farmers
5.2. Impact of alternative power policy underreporting the horsepower of their pumps. Correct reporting would result in the
profits and power revenue given in parentheses, below the starred levels in row 1.

The water rationing we observe can be removed by providing

incentives for adequate power supply: pricing electricity at the margin
to fetch a profit for the power provider. But is the resulting increase in
farm output and profit sufficient to pay for the increased cost of
electricity? We carry out a simulation to answer:
What would be the effect of unit pricing of power and reliable power
supply, on yields, profits, irrigation volumes and power revenue?
The estimation is modeled as follows: each unit power price is
translated into a unit cost of water extraction, the exact conversion
depending on pump horsepower. Eq. (7) of Section 4 says that for
water allocations determined by Nash bargaining, the absence of a
water constraint will lead to MVPWs being equated to the unit cost of
extraction. Using this and the estimated production function and
other input prices, we simulate using different power prices, optimal
input choices for buyers and sellers of water, water allocation, and
village averages for yield, profits, irrigation volumes and power
revenue (see Appendix A.3 for details). We vary the unit power price
from Rupees 2.0 (comparable to some estimates of average power
generation costs in India; power transmission and distribution costs
are additional), to Rupees 4.4 per kilowatt hour (kW h). The latter
roughly corresponds to industrial rates in several parts of the country.
An extract of the results is in Table 6. Sample values for yield, profit
per bigha, irrigation volume per bigha and power revenue per bigha
are respectively 58.22 quintals, Rupees 2490, 28 bigha-inches and
Rupees 270. 20 These are recorded in Table 6 as the “sample” scenario;
for which the unit power price is zero (and there is a lump sum
monthly charge of Rupees 70 per reported horsepower). At a power
price of Rupees 4.40 per kW h, irrigation volume is 25 bigha-inches,
yield is about 60 quintals, profits are Rupees 2350, and revenue to the
power provider is Rupees 620. As the power price is lowered,
irrigation volumes and yields increase, and power revenue per bigha
decreases. At 28 bigha-inches of irrigation, the yield of 61 quintals is
2.88 quintals above the sample yield of 58.22 quintals. Part of this
increase is attributable to higher input use in the simulation relative to
the sample; with positive cross-partial derivatives in the production
function, this increases yield at the same level of water-use as in the
sample. Yield increments thereafter diminish at higher irrigation
levels.
Table 6 shows that for power prices up to Rupees 3.50 per kW h,
farmers' profits are greater than their sample values; the higher
simulated yields can therefore pay for electricity prices that cover the
cost of power generation. 21
The simulation therefore implies that even in the presence of a
social contract that results in a close-to efficient allocation of scarce
water, a switch to remunerative power pricing is feasible, acceptable
to both farmers and power providers, and will result in a substantial
increase in yields. In the absence of a power supply constraint, the
tubewell to irrigation plot mapping may get altered; so that allocating
water from relatively efficient tubewells to high marginal value plots
may lead to larger benefits than indicated in the simulation.
6. Discussion and conclusions
Before summarizing our results and drawing inferences from them
it is important to address how generalizable our findings are, given
that they are based on an analysis of water transactions from a single
village. Some (not all) features of our sample village that drive our
model and results are to be found in the western Gangetic plain.
Consider first, the water depth and the use of electricity (instead of
diesel) to draw water: Data from the third Census of Minor
Irrigation, 22 conducted in 2000–1, suggests that 46% of villages in
Baghpat district, in which our study village is located, have water
tables exceeding 15 m (about 50 ft—our village had a water table of
55 ft). In the western Gangetic plain, comprising of Western Uttar
Pradesh, Haryana and Punjab – the traditional mainstay of the Green
Revolution – 28% of the villages had water tables greater than 15 m. At
these levels, it is uneconomical to use diesel to fuel the pumps; 10
farmers have to rely primarily on electricity. It is well known that this
region has problems with irregular and inadequate supply of
electricity to agriculture; see for example Pant (2004), Singh and
Singh (2003), and Srivastava et al. (2009).

19
This result provides support for the model of a village-level contract. The
proximity (or absence thereof) of tubewells in a village can naturally give rise to
models of local monopoly or oligopoly with very different implications for allocative
efficiency. See Jacoby et al. (2004) for one such formal model.
20
Profit is calculated as revenue minus wage cost, rental costs of tractors and oxen,
fertilizer cost and water cost; and cost of power for tubewell owners. We do not
subtract imputed land rent, as there is very little land given out on rent. The wage cost
includes an imputed wage for family labor.
21
In the present setup of lump sum power payments based on pump horsepower,
there is widespread underreporting of horsepower. Accurate assessments of pump
horsepower would decrease sample profits and increase sample power revenue by
Rupees 270 per bigha each. Under such an alternative baseline scenario, Table 6
suggests that power prices higher than Rupees 3.5 per kW h are consistent with profits
being larger than their baseline values as valued at higher pump horsepower.
22
Data downloaded from http://mowr.gov.in/micensus/mi3census/reports/statelvl/
up/6p2.pdf, accessed July 16, 2011.
 A. Banerji et al. / Journal of Development Economics 98 (2012) 228–237
A second key institutional feature is land fragmentation. Frag-
mentation is a feature of agriculture not just in the western Gangetic
plains, but in much of India. A nationally representative survey of over
52,000 rural households undertaken by the National Sample Survey
Organisation (2006) shows that the average number of parcels per
operational holding in Uttar Pradesh was 2.7–2.8 in 2003, the year
before our survey was conducted. Similarly, Srivastava et al. (2009)
report an average of 2.6 to 3.7 fragments in Central Uttar Pradesh.
The third institutional feature driving our results is the existence of
a single water price in the village. Other studies have noted this
phenomenon; for example Dubash (2002) and Mukherji (2007).
Aggarwal (2007) also notes that the uniformity of water prices within
a village is a common feature of groundwater contracts; further she
notes that there appear to be no interlinkages of water with land,
labor or credit. This is certainly the case in our village; however it is
not possible to determine how widespread is the practice of uniform
prices and lack of interlinkages with other key inputs. 23
In addition to the single-village nature of our data, the other
limitations of our analysis are that it is static in nature (we do not
model the intertemporal consequences of power pricing reform) and
that it relies on production function estimates derived from a single
cross-section that cannot fully account for endogeneity.
With these caveats in place, we turn to a summary of the main
results and their implications. First, we demonstrate and model a
social contract governs village water transactions. The observed
village-wide water price lies within the bounds predicted by our
model. Second, despite a uniform village-level water price that has no
bearing on the marginal value product of water, we observe that the
social contract translates into a spatially-efficient allocation of water.
This is a striking result, in contrast to much of the literature that
construes the pricing of water at higher than marginal costs to be
indicative of inefficiency and monopoly power; see for example
Jacoby et al. (2004), Meinzen-Dick (1996) and Shah (1993). The
policy debate should thus shift away from an almost-exclusive focus
on issues related to water allocation within villages to more systemic
inefficiencies.
Despite evidence of spatial efficiency, the inadequate supply of
power extracts a substantial toll: it reduces crop yields by adversely
affecting the volume of irrigation. Our study suggests that switching
to an alternative regime of pricing power and supplying it reliably can
increase sugarcane output by up to 9%; the resulting increase in farm
profits being more than sufficient to cover the marginal cost of
providing power. Switching from a non-remunerative power price-
poor power supply regime to a higher price-reliable supply one can be
viewed as a move from a low-level to a high-level equilibrium. 24
However, implementing institutional change in the power regime can
be challenging and necessitates a discussion on public versus private
ownership of power supply, regulation, and political capture that is
the subject of a separate study. Our analysis only points to the gains
that can accrue if it were to happen.
Acknowledgments
We are indebted to the South Asian Network for Development and
Environmental Economics (SANDEE) for funding this project, Ajay
Kumar and Rajpal Singh for research assistance, R.P. Singh and D.R. Singh
for help with logistics, Ch. Ranjit Singh's family for their hospitality, the
23
The nation-wide survey referred to earlier reports that leasing-in of land has been
declining over time, and accounted for less than 10% of area in 2002/3. This includes
area leased not only for cash, but also under sharecropping and other contractual
terms.
24
See Spiller and Savedoff (1999) for a general discussion of such institutional
change with respect to water provision.
235
National Bureau of Soil Surveys and Land Use Planning and the Water
Technology Centre at the Indian Agricultural Research Institute for help
with soil analysis and discharge measurement respectively. We also
thank Partha Dasgupta, E. Somanathan, Enamul Haque, Nirmal
Sengupta, Priya Shyamsundar, Rohini Somanathan, and the referees of
this journal for helpful comments. The usual disclaimer applies.
Appendix A.1. Estimating marginal cost of water extraction from
a tubewell
Farmers pay a lump sum annual electricity charge for running a
tubewell. So the marginal cost of water extraction includes only those
maintenance costs that depend on water output. Maintenance costs
are essentially costs of repairing the pump set in the event of a
breakdown. While the frequency of breakdowns is high due to power
surges, what is germane here is that the number of breakdowns may
depend on the number of hours that the tubewell operates. It also
depends on whether the machine is a submersible (fewer break-
downs) or a non-submersible. We assume that the number of
breakdowns follows a Poisson process (see Ross, 1997) with
parameters μ1, μ2 for submersibles and non-submersibles respectively.
Let J1, J2 be the sets of submersibles and non-submersibles respec-
tively. So, for submersible tubewell j, the probability that the number
of breakdowns N equals nj if it runs for time hj,

n


 
j
−μ1 hj
μ1 hj
Pr N hj −Nð0Þ = nj = e : ðA:1:1Þ
nj !
Using Eq. (A.1.1) and data on total number of breakdowns and
number of running hours for each submersible tubewell, we set up a
likelihood function and get an estimate μ̂ 1 for the Poisson parameter.
Since the likelihood of the submersible sample (hj, nj)j ∈ J1 is
∑ nj !
−μ1 ∑ hj j∈J1
n
hj j
e j∈J1
·μ1 ·Πj∈J1 ðA:1:2Þ
nj !
the first order condition yields the maximum likelihood estimate
∑ nj
j∈J1
μ̂ 1 = ðA:1:3Þ
∑ hj
j∈J1
which is just the total (or average) number of submersible breakdowns
in the data divided by the total (or average) number of hours that
submersibles in the data ran for. A similar exercise yields the Poisson
parameter estimate for non-submersibles.
Suppose that it takes time tj to extract 1 unit (bigha-inch) of water
using submersible tubewell j.
Then, the expected number of breakdowns in this time,



E N tj = μ̂ 1 tj : ðA:1:4Þ
Our estimated marginal cost of water extraction from this tubewell
is the above number times the average cost of repair.
Appendix A.2. An example of the social contract which includes
pure water buyers, pure sellers, and farmers who both buy and
sell water
This example illustrates a case in which some farmers are
simultaneously water buyers and sellers, while others are either
buyers or sellers. Suppose there are 3 locations and there is water
236 A. Banerji et al. / Journal of Development Economics 98 (2012) 228–237
rationing. In location 1, there are 3 plots, owned by farmers 1, 2 and b;
farmer 1's plot alone has a tubewell (TW) and services all 3 plots. In
location 2, farmers 2 and 3 have a plot each. Both plots have TWs; so
that in a situation of limited power and water supply, either farmer's
TW can serve the other plot, if that plot is the more productive/larger
one. In location 3, farmers 3 and 1 have a plot each; only farmer 3's
plot has a TW, and this services farmer 1's plot as well. Let (p,w) refer
to a water price and a vector of water allocations across all 7 plots: i.e.
w = (w11, w21, wb, w22, w32, w33, w13) where the subscripts follow the
convention in Section 4, and the subscript b refers to the pure water
buyer whose plot is in location 1. We describe the Pareto Frontier
under water rationing as follows, following Section 4 in the text
(normalizing the output price to 1):
Maxðp;wÞ A11 f ðw11 Þ + A13 f ðw13 Þ + pw21 + pwb −pw13 −cw1
s:t: A22 f ðw22 Þ + A21 f ðw21 Þ−pw21 −pðw22 −w2 Þ−cw2 = π2
A33 f ðw33 Þ + A32 f ðw32 Þ + pw13 + pðw22 −w2 Þ−cw3 −cw32 = π3
Ab f ðwb Þ−pwb = π 3
wb + w11 + w21 = w1
w22 + w32 = w2 + w32
w33 + w31 = w3 :
Constraints (A.2.1)–(A.2.3) hold profits of farmers 2, 3 and b
constant at the RHS values. Constraints (A.2.4)–(A.2.6) constrain
water to the RHS values; the RHS of constraint (A.2.5) has water
supply from TWs owned by farmers 2 and 3 respectively, at location 2.
Adding constraints (A.2.1)–(A.2.3) and substituting in the objective,
we can rewrite the above problem as follows.
MaxðwÞ A11 f ðw11 Þ + A13 f ðw13 Þ−cw 1 + A22 f ðw22 Þ + A21 f ðw21 Þ−cw2
−π 2 + A33 f ðw33 Þ + A32 f ðw32 Þ−cw3 −cw32 −π3 + Ab f ðwb Þ−πb
s:t: wb + w11 + w21 = w1
w22 + w32 = w2 + w32
w33 + w31 = w3 :
Let the multipliers associated with constraints (A.2.4)–(A.2.6) be
λ4, λ5, λ6. The first order conditions imply
A11 f ′ðw11 Þ = A21 f ′ðw21 Þ = Ab f ′ðwb Þ = λ4 ; A22 f ′ðw22 Þ = A32 f ′ðw32 Þ
= λ5 and A33 f ′ðw33 Þ = A13 f ′ðw13 Þ = λ6 :
So, the marginal value products across plots serviced in each
location are equalized. The other implication of the model presented
in Section 4 carries over as well: the water price p is contained in an
interval obtained by considering the profits under agreement, and
disagreement points, of net water sellers and net water buyers, such
that all farmers have an incentive to participate in an agreement
rather than opt out.
Suppose that in location 2, the 2 tubewells have similar water
output (w2 ; w32 are about the same) and farmer 2's plot is more
productive/larger (captured by A22 > A32). It follows then from the
first order conditions and constraint (A.2.5) that farmer 2 will buy
water from farmer 3 at location 2. Thus this example provides a
typology in which farmer 1 is on both sides of the water market
(buyer and seller), farmer 2 owns a tubewell but only buys water,
farmer 3 sells water but does not buy, and farmer b does not own a
tubewell and buys water. The implications on allocative efficiency are
unchanged.
Appendix A.3. Modeling the policy simulation in Section 5.2
Suppose farmer s owns plot s, and the tubewell t on it, and suppose
that B(t) is the set of plots that buy water from this tubewell. With
reliable power supply, the high density of tubewells, and the present
aquifer depth, there is no water constraint. Suppose that farmer s's
  
optimal
  input  choices are x̂sj ; x̂sJ , and those for the water buyers are
x̂ij ; x̂iJ i∈Bðt Þ (the Jth input being water). The social contract in this
‘no water constraint’ case, discussed in Eq. (7) in the text, suggests
that water would be allocated efficiently, which now translates to
equating MVPW on any plot with the unit cost of water extraction ct
from tubewell t. With prices ps for sugarcane, and qj, j ≠ J, for other
ðA:2:1Þ inputs, we can solve for the optimal input choices of farmer s as
follows:
ðA:2:2Þ " #


 

 
x̂sj ; x̂sJ ∈ arg max ps f xsj ; xsJ ; β − ∑ qj xsj −ct xsJ : ðA:3:1Þ
ðA:2:3Þ j
ðA:2:4Þ
And similarly for all plots i ∈ B(t),
ðA:2:5Þ
" #
ðA:2:6Þ

 

 
x̂ij ; x̂iJ ∈ arg max ps f xij ; xiJ ; β − ∑ qj xij −ct xiJ : ðA:3:2Þ
j
That is, the optimization problems of the different plots can be solved
separately, because there is no common water constraint as in the
simulation in Section 5.1. From the solutions to plot level optimization
problems, we derive per bigha averages for output, profit, irrigation
volume, and power revenue, and compare them with the baseline
numbers observed in the data.
Basic Assumptions: In the data set, tubewell pump set owners are
charged Rupees 70 per horsepower per month. Most farmers
ðA:2:4Þ misreport pumps to have 10 hp, so annual charges are about Rupees
8700 (8400 +other minor charges). But in actual fact, almost all
ðA:2:5Þ pumps run on 20 hp. 25 We base our simulations on this fact. Thus a
unit power price of y rupees per kW h translates to approximately 15y
ðA:2:6Þ
rupees per hour, for a 20 hp pump. 26 Dividing this by the discharge
from the tubewell, and adding to that the estimated marginal cost of
water extraction from this tubewell in the absence of unit pricing of
electricity (as in the data), 27 we get a simulated unit cost of extracting
1 bigha-inch of water from it. With the extraction costs from each
tubewell in place, and other input and output prices as given in the
sample, we endow each plot with the estimated production
technology, and allow each plot in the sample to choose labor
hours, oxen hours, and irrigation volumes, in order to maximize
profits as described by Eqs. (A.3.1) and (A.3.2). 28 Note that we hold
fixed the mapping of tubewell to user plot; this determines specific
water costs for each plot.
25
Given the shortage of electricity to pump water, farmers compensate by having
more tubewells and horsepower than would otherwise be necessary, in order to pump
up water as quickly as possible.
26
Since 1 hp is approximately 3/4 of a kilowatt. Unless the pump is simply idling, a
running 20 hp pump consumes close to that.
27
As reported earlier, the estimated marginal costs of extraction for non-
submersibles and submersibles pumpsets average to, respectively, Rupees 1.45 and
Rupees 0.3 per bigha-inch of water.
28
Acreage and the variables with insignificant estimates (Table 3) are not optimized
over.
 A. Banerji et al. / Journal of Development Economics 98 (2012) 228–237
Appendix A.4. Data collection details
To construct our sample, we first conducted a census of all
households and tubewells in the village. We used a random number to
draw the first tubewell in the sample, and then selected every second
tubewell on the census list. From this initial list of sampled tubewells,
we mapped all the plots they served: these were cultivated by 105
farmers, who were included in our sample. If these farmers had plots
served by other tubewells or owned more than one tubewell that was
not in our initial list, we incorporated those tubewells into the sample
as well. In this way, we had a sample of 73 tubewells (out of a village
total of about 110), serving 326 plots cultivated by 105 farmers.
Including all plots serviced by a tubewell implies that we can compute
the total amount of water discharged by each tubewell over the
season, as well as the entire water allocation from it to various plots.
This enables us to pose counterfactuals about the effect of reallocating
this volume of water across plots serviced by each tubewell.
Data were collected at three levels: tubewell, plot, and farm
household. Tubewell data (including the depth of the tubewell,
capacity of the motor, tubewell discharge, maintenance costs and
history) helps to estimate water supply characteristics. Plot-specific
data (including details on source of irrigation, date of each irrigation,
the number of hours the pumpset was run to deliver water, the terms
of the water transaction, information on labor and other inputs, and
soil quality) is needed to estimate the demand for irrigation water.
Farm household data (including information on household members,
and their education levels, and farm assets) can potentially help to
identify farmer-specific effects on production. Field work was
conducted once every 2 to 3 weeks, over the entire sugarcane cycle
(2004–2005). This frequency corresponded to the pattern of irriga-
tions; and given the large number of plots to be tracked, helped in
keeping the recall period low. We obtained assistance from the Water
Technology Centre, Indian Agricultural Research Institute for deter-
mining irrigation volumes and tubewell discharges, 29 and from the
National Bureau of Soil Surveys and Land Use Planning in collecting
and analyzing soil samples.
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