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Selected Presentation at the 2020 Agricultural & Applied Economics

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Selected Presentation at the 2020 Agricultural & Applied Economics Selected Presentation at the 2020 Agricultural & Applied Economics Association Annual Meeting, Kansas City, Missouri, July 26-28 Copyright 2020 by authors. 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. Agricultural Water right reforms and Irrigation Water Demand: A Quasi-Natural Experiment in China Yi Cui, Xiaodong Du, Jiuje Ma Abstract Based on the quasi-natural experiment of water rights reform carried out among randomly selected potation growers in Northern China, we assess the causal impact of water right reforms, including ban on borewell drilling and r water price reform, on irrigation water demand. Exploiting plot and household panel data in 2007, 2012 and 2017, we seek response to and driving factors of their compliance to the reform policies. We find that while increasing number of borewells increase average water consumption adoprion of water-saving technology significantly improves water efficiency and thus reduces water consumption. With the reform, owners of irrigaton borewells face a lower price. It is not the water price but the water trade market brought by water price reform that affects farmers’ water-saving behavior. However, borewells ban does not have significant water saving effects as we expected. Key words: borewells ban, ownership structure, technology adoption, water price, water use right JEL classifications: Q12, Q15, R23 1 1. Introduction With rapid industrial and agricultural development in recent years, China is facing serious problems of groundwater overexploitation, which occurred in 21 provinces covering about 300,000 square kilometers (China Geological Survey, 2018) and in turn, caused a series of problems such as land subsidence, water pollution and environmental degradation. North China Plain (NCP), including the Hebei, Shandong and Henan provinces, is the region with the lowest per capita water resource, where the groundwater overexploitation is about 10 billion cubic meters, 60% more than other plain areas in China (Ministry of Water Resources of China, 2019). NCP is also the largest groundwater depression area in the world (Chinese Academy of Sciences, 2018). For example, the average annual volume of overexploitation in Hebei (a province in North China Plain) is about 6-7 billion cubic meters (People’s Daily Online, 2019). A large pore shallow groundwater overexploitation area of 1031.84 square kilometers exists in Hohhot City, Inner Mongolia resulting from a long-term increase in groundwater intake (Hohhot Daily, 2018). Agricultural irrigation is an important reason for groundwater over drafting accounting for 61.4% of China’s total water consumption in 2018 (China’s macroeconomic database, 2019). In the main grain producing areas of northern China, more than 70% of the total agricultural water supply comes from groundwater (China Geological Survey, 2018). Since the 1980s, the number of borewells in China has increased from 2.665 million to 5.079 million (China Water Conservancy database, 1980-2017). Therefore, dissemination of water-saving irrigation technology and construction of efficient agricultural water-saving system are important to improve utilization efficiency, to reduce pressure of overdraft, and to maintain long-term water supply and demand balance (Shikuku, 2018). However, evidence has shown that technology alone is not sufficient to ensure productivity gains, let alone sustainability (Dick, 2014). Groundwater and irrigation facilities owned by the village collectives are easy to fall into “tragedy of the commons” (Coase, 1992). Therefor, it requires appropriate institutional and policy innovations to alleviate this dilemma. 2 Currently policies and reforms such as groundwater exploitation restrictions and water pricing mechanism are piloting in China to accompany technologies diffusion of sustainable irrigation. Started in 2013, China launched pilot projects on strict borewell ban in some regions for alleviating the over exploitation of groundwater. In 2014 seven provinces in China, including Henan, Ningxia, Jiangxi, Hubei, Inner Mongolia, Gansu and Guangdong, firstly carried out integrated price reform of water used for agricultural purposes. Both of the reforms imposed the restriction on water rights, in which ban on borewells weakens farmers’ access to groundwater and restricts farmers’ water use right and groundwater consumption, and on the other handsupply side; the rational water price mechanism establishes a water market system and enables water rights transaction. In order to study the water-saving effects of the water right reforms, based on the micro survey data of farmers from the main potato production areas in North China in 2013 and 2017, this paper empirically investigate the impact of the borewell ban and water price reform on farmers’ irrigation behavior. Our contributions to the literature are three-fold: First, heterogeneous outcomes of water right reform indicates that water consumption is reduced because adoption of water-saving technology and restriction of number of borewell. Second, ownership structure of irrigation borewells affects water price and thus the water-saving effect of water right reforms is heterogeneous among groups of different borewell ownership. Third, borewells ban does not have significant water saving effects as expected, which indicates that regulation policy should be accompanied by market-based measures to work well.The present study proceeds as below. The next section reviews the background of the water use policy and water rights 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 Water related regulation policies can be divided into two categories: public intervention and 3 decentralized governance (Gruber, 2016). The former mainly includes quantity or price intervention by governments at all levels or public sector entities (Weitzman, 1974). The latter eliminates negative externalities of resource abuse and achieves optimal resource allocation through market-oriented transactions or negotiations between relevant subjects of resources and property owners (Coase, 1960). The regulatory policies discussed interact and inter-prerequisite each other in practice (Stavins, 2003). For example, defining property right of natural resources cannot simply rely on the spontaneous regulation of the market and often requires the intervention of the public sector when number of related subjects is huge and transaction and negotiation costs are high (Schmitz, 2015). Similarly, the water right reforms adopted in the pilot area studied in this paper are a combination of government regulation and marketization. It also has some unique characteristics, including, (i) the total amount of control aim directly at the total amount of irrigation borewells instead of water resources; (ii) the initial borewell ownership distribution came from registration of early borewells constructed by farmers; and (iii) the trading object is not the resource property rights or licenses, but the resource flow (selling irrigation water). The present literature on water resource management focuses on either the mechanism and welfare consequences of water quota system, which is a typical government intervention policy and directly limits individual farmers’ water intake (Banerji et al., 2012), or on the auction, matching and pricing of water resources in the water right market (Raffensperger, 2011). Analysis of the effects of water right reforms on water consumption behavior enhances our understanding of the optimal combination of government policies and market in water resource management. It is an important topic in the fields of public management and public economics to theoretically analyze the impact of resource regulation policies on producers’ technology adoption, technology innovation and resource consumption behavior, and to empirically quantify the policy impact in empirical research (Popp, 2019). Our study is related to three research fields: technological changes induced by the changes of factor cost and future benefits due to resource regulation (Aemoglu et al., 2012), the effects of property right 4 structure and governance methods on technology adoption and innovation (Stavins, 2011), and the impact of water rights on technological and water consumption with resource regulation (Foster and Rosenzweig, 2020). Resource regulation directly affects the cost of regulated resources, and in turn future benefits of producers. In the short term, the increase of production cost may reduce the capital to invest in new technology (Jaffe et al., 1995). But in the long run, if advanced technology can reduce the consumption of regulated resources, it may promote adoption new technology and investment in technological innovation (Porter et al., 1995; Goulder and Mathai, 2009). In view of this, the focus of theoretical research is to explore dynamic consequences of various regulatory policies through simulation and calibration for the design of optimal policy scheme (Perino and Requate, 2012; Krysiak, 2011). Empirical research focuses on the evaluation of effects of specific or mixed policies on consumption or technical behavior of producers (Calel and Dechezlepretre,
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