The Use and Usefulness of Irrigation Property Reform for Sustainable Agriculture Yi Cui, Jing You, Jiujie Ma, Renmin University of China, [email protected] Selected Poster prepared for presentation at the 2019 Agricultural & Applied Economics Association Annual Meeting, Atlanta, GA, July 21-23 Copyright 2019 by [Yi Cui, Jing You, Jiujie Ma]. All rights reserved. Readers may make verbatim copies of this document for non-commercial purposes by any means, provided that this copyright notice appears on all such copies. The Use and Usefulness of Irrigation Property Reform for Sustainable Agriculture The curfew tolls the knell of parting day, The lowing herd wind slowly o’er the lea The ploughman homeward plods his weary way, And leaves the world to darkness and to me. -- by Thomas Gray Abstract: By utilising a recent reform on irrigation property rights in rural China and a unique plot-crop-level panel dataset with 1,106 plots out of 413 households over the period 2013-2017, we assess the causal impact of irrigation property reform on rural households’ adoption of different irrigation technologies and investigate the underlying mechanisms. The Chinese government piloted a reform of water rights in 2014. Prior to it, irrigation water used for agricultural production was free. After clearly defining and allocating the water rights for each well (either dug, driven or drilled ones) in the village, rural households began to pay water fees in agricultural production in 2015. To address heterogeneous treatment effects conditional on the initial structures of the irrigation property (including the privately-owned, jointly owned between the farmer(s) and the village committee, or collectively owned by the village committee), we apply a difference-in- difference-in-difference (DDD) strategy to the plot panel data, where we compare the evolution of outcomes in villages that have had the reform in villages that have not yet implemented the reform. We also did tests of sources of variations, placebo regressions and robustness checks to make the results of the analysis seem robust. We further explore transmission channels from the “demand” side (i.e., households’ perspectives). We found that households’ satisfaction and cooperative incentives play a role – those having higher satisfaction with the existing irrigation systems or stronger cooperative incentives in solving difficulties are less likely to adopt water-saving irrigation (WSI) techniques after the reform. This indicates that while the irrigation-property rights reform encourages WSI adoption, households only consider WSI techniques as substitutes of other existing water use conditions. By doing mechanism tests we find that the effect of reform policy on farmers’ behaviour was altered by cultural norms and social concepts/actions of the treated groups. We then summarise policy implications to a series of property reforms in the Chinese agricultural sector. Key words: Water, Irrigation, Property right, Technology adoption, Sustainable agriculture JEL classifications: Q15, R23, Q12 1. Introduction Irrigation and water-saving technologies are crucial to farmers’ adaptions to climate change and sustainable agriculture. However, experience of irrigation has shown that technology alone is not sufficient to ensure productivity gains (Dick, 2014). Appropriate policies and reforms, such as creating water right institution and carrying out a rational water price mechanism are needed to accompany water-saving irrigation (WSI) for sustainable agriculture. Among these key factors, property rights play a particularly important role. Element theory of property rights shows that as resource becomes scarce, users of the resource compete with each other and even come into conflict, making it essential to define clear property rights, or at least the security of water using right. Water right is the specific application of property rights theory in the field of water resources management. The construction of water rights system is considered to be an effective means to improve the efficiency of water resources allocation and utilization. While the role of irrigation property reform contributing to sustainable natural resource management is increasingly recognized, translating that into practice is more challenging (Deininger,2003), especially in developing countries. Customary water rights are likely to be particularly strong in these countries, often varying from one context to another, and differing from local policies (von Benda-Beckmann et al., 1998). Besides, as North (1990) notes, institutional change is path dependent: it is inherently shaped by the history of a particular place. Thus, the evaluation of the causal effects of property rights is a difficult task as their allocation is typically endogenous (Galiani and Schargrodsky, 2010). Moreover, there also exist debates claiming that privatization of property rights has not eased the “tragedy of the commons”, but has led to more serious resource depletion due to rational growth and “technical externalities” (C.W.Clark, 1980). Therefore, some scholars still doubt the operability and necessity of establishing individual property rights in field of natural resources. In China, the irrigation property reform was initiated in 2014. Since then, government also began to impose irrigation fees in agriculture production on farmers, especially when the irrigation well is not owned by that household. If households only have partial ownership rights of the irrigation well, they pay water-use fees for the remaining property rights beyond their ownership. With private ownership of irrigation wells, however, farmers could not only use water with the lowest water cost (only includes electricity costs of irrigation well in most circumstances), but also sell water to others who don’t own a well. At first glance, this division of property rights appears rather weird, for the right to sell water is hold as the joint property of the members of the organization while the right to use water is held as an individual property right. The explanation of this issue may lie in the fact that joint ownership of the right to sell water to outsiders may be one method of promoting jointly optimal water use given the presence of spill-over effects between the members of the organization. Traditional property rights theory predicts that such a reform defining costs based on the structure of property rights would encourage water-saving technologies for those do not hold irrigation property rights. But, considering the conflicts between theories and reality, could these contractual arrangements in irrigation property, in fact, promote the efficient use of the water rights controlled by the organization? The impact of irrigation property reform on farmers’ behavioral responses of adopting WSI still remains to be tested. The present study proceeds as below. The next section reviews the background of the water use policy and property reform in rural China and previous findings. Section 3 spells out identification strategy and the empirical methodology. Section 4 describes data and uses it to testify assumptions underlying causal identification. Section 5 discusses estimation results. Section 6 concludes with policy implications. 2. Literature review There have been a number of studies investigating the determinants of farmers’ adoption of WSI, such as water availability and climatic conditions (Olen et al., 2016), perceptions on challenges of adoption (Gebremeskel et al., 2018), awareness of water scarcity (Tang et al., 2016) and potential benefits from adoption (Chang et al., 2016; Lichtenberg et al., 2015), perceptions on risks and challenges of WSI (Dai et al., 2017; Gebremeskel et al., 2017), farmers’ characteristics such as education, gender, economic incentives shaped by water pricing (Cooper and Keim, 1996; Cremades et al., 2015) and (increasing) prices of outputs (Taylor and Zilberman, 2016), cooperative incentives (Mattoussi et al., 2014), land ownership (Burnham et al., 2015), the irrigation conditions (Yamagachi et al., 2019), and governance (Blanke et al., 2007; Malik et al., 2018). To ensure sustainability, water needs to be used efficiently. New institutional economics have evaluated the relative efficiency of private property (Ostrom, 1990). Therefore, the ability to solve the problems of collective action and property rights is essential for water (M. Hanemann, 2014). A necessary condition for the efficient use of water is the existence of a well- functioning system of property rights. Many government officials and irrigation programs have called for farmers to develop a “sense of ownership” over the irrigation systems so that they will avoid excessive water use (Vermillion, 1987). Thus it’s important to formulate a policy about how to hand over the responsibilities to the water users (N.Sengupta, 1987). This paper links this strand of literature to the irrigation property rights. Studies of farmer-managed irrigation systems showed that in many cases these performed better than village-managed systems (Lam, 1998; Ostrom, 1992; Tang, 1992; Uphoff, 1986). As Dick (2014) noted, property rights to water can give users some assurance that their investments in irrigation will be sustainable. Well-defined and secure property rights are institutional foundations in designing water pricing and allocation mechanisms (Ostrom, 1992), in order to promote investment and production (Coase, 1991). Coward (1986) explicitly recognized the link between property rights and infrastructure