Selected Presentation at the 2020 Agricultural & Applied Economics

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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.

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, 2016).

However, the impact of policies on technical adoption and consumption behavior is heterogeneous within and across countries (Popp et al., 2010). Taking water rights reform as an example, while the role of water rights reform contributing to sustainable 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 developing countries, often varying with context, and different from local policies (von Benda-Beckmann et al., 1998). Moreover, as North (1990) notes, institutional change is inherently shaped by history and thus path dependent. Evaluation of the causal effects of water rights is a difficult task when the allocation is typically endogenous

(Galiani and Schargrodsky, 2010). Therefore, it is of great practical value to design appropriate strategies to evaluate the consequences induced by specific regulatory policies in certain contexts. Our study evaluates the impact of water right reforms in the forms of borewell ban and water price reform on farmers’ demand of irrigation water , which enriches the existing research in the field.

Property right distribution of regulated resources is expected to affect technical choices of 5 producers (Place and Swallow, 2000). A clearer ownership encourages the owner to invest in the asset, promotes relevant technology adoption and innovation (Grossman and Oliver, 1986).

The present research on the relationship between property rights and technological choices focuses more on the role of land ownership in the adoption and diffusion of agricultural technology (Nguyen, 2019). There is a lack of systematic empirical evaluation on the relationship between water right and adoption of water-saving technologies. This paper fills the gap by quantifying the impact of irrigation well ownership on farmers’ adoption of water-saving technology and production behavior.

3. Institutional Background

It is well recognized that groundwater pumping by farmers reduced the availability of water aquifer recharge, especially in the groundwater management districts in northern China. To reduce the impacts on groundwater level, they have imposed the strictest control over water resources, rationally set and adjusted water resource fees in different localities, and carried out integrated price reform of water used for agricultural purposes. Water rights reform was proposed in December 2014 in several pilot areas of northern China in the forms of imposing water price and restricting construction of new irrigation borewells, which are expected to correct consumption externalities, to encourage water-saving technology adoption, and to discourage well construction by farmers. In this paper, we focus on the water right reforms implemented in two pilot provinces, Hebei Province and Inner Mongolia, and to evaluate the water-saving effects of these policies. Both are groundwater overexploitation areas and have large range of potato producing farmlands facing problem of groundwater shortage.

Figure 1. Water Rights Reform Process of China

The Water right reforms pilot project in Hebei Province and Inner Mongolia started in

2014. It was initially carried out in 8 water-short counties of Hebei Province and developed rapidly in the following years. The pilot program is to charge water fee according to electricity consumption during irrigation, that is, to add an extra fee to the original electricity bill. The water price was calculated at the county level and vary slightly across regions.

Typically it is no more than 0.2 yuan per cubic meter of water. Water price in Inner Mongolia is similar to that of Hebei Province. Farmers do not pay for the water from their own irrigation wells, which can be private or joint ownership1, but pay if the wells owned by others or the village. Different ownership structure of irrigation borewells is expected to have different constraint and incentive mechanisms for water use behavior. With the clear property rights, individuals who owned irrigation borewells have a strong incentive role in water conservation. For irrigation borewells with collective ownership, the public goods attribute is

1 The joint ownership describes irrigation borewells investigated together by several small farmers. During the process they jointly invest in drilling wells and installing pumps. They subsequently use and managing the borewells together. 7 generated due to their large coverage groups, and the problem of “free riders” frequently appears (Olson, 1977). When the owners of the joint ownership of irrigation borewells are clear, and the characteristics of “acquaintance society” in rural China make it possible for the joint owners to form a long-term interactive mechanism of mutual supervision, the “free riders” problem will be effectively avoided. Therefore, the joint ownership can have the same policy effect as the private ownership (Ostrom, 1993).

Another more stringent water rights reform, borewell ban, was also carried out in Hebei

Province and Inner Mongolia. In 2013, based on the water licenses system2, China launched pilot projects on borewells regulation in some regions. The policy is aimed at alleviating the over exploitation of groundwater by implementing strict borewell ban. In Hebei province, the construction of new irrigation wells by individuals and enterprises has been restricted in 2013.

Drilling a new borewell requires a well-drilling permit. Since 2015, with the implementation of the Regulations on the Administration of Groundwater in Hebei Province, construction of new borewells is completely prohibited in groundwater overexploitation areas. With the

Administrative Rules for Groundwater in Inner Mongolia Autonomous Region issued in 2013 the number of private wells was strictly regulated. At the prefecture level, since 2014, water bureaus in Hohhot, Ulanqab, Shijiazhuang, Zhangjiakou and other cities have successively forbidden borewells-drilling for groundwater without permission and regulated the rights of borewells-drilling of individuals and enterprises. In the practice of rural governance, we found through the field survey in Inner Mongolia and Hebei Province that the well-drilling restriction has been carried out in pilot villages, which limits the increase of new irrigation

2 According to the regulations, water users should get water-intaking license before drawing water directly from rivers, lakes or groundwater. This is also known as “regulation of permission requirement of drawing water from water body”. 8 borewells in these villages, and has an impact on the water use behavior of farmers3. The changing process of water rights reform of these two provinces is showed in Table 1.

Table 1. Policy Change Process in Sample Provinces Year Hebei Province Inner Mongolia Water rights trading pilot started. Inner 8 counties were firstly identified as the pilot 2014 Mongolia began to explore various forms areas of water rights reform. of water rights trading circulation mode. The pilot areas expanded to 49 counties (28.5%). Legal private irrigation wells were awarded a title certificate, while illegal ones 2015 Water price reform was introduced. were shut down. Borewell ban reform was accompanied by water price reform. 2016 The pilot areas expanded to 115 counties (66.9%). Inner Mongolia established water rights “Agreement on Agricultural Water Transaction” trading platform. was introduced. 47 new counties were added in pilot regions. Water right reforms were completed in 161 2017 counties (cities, districts) (93.6%). The reform of water rights system was further strengthened. Notes: Water rights reform of China is a quite complicated one and contains a lot of measures or contents. Except for water price reform and irrigation property reform, there are also policies as water allocated quotas, water rights trading pilot and a license limitation program in construction of irrigation wells.

4. Conceptual Framework

As discussed above, water rights reform contributes to sustainable natural resource management. However, experiences show that the reform and its implementation do not necessarily lead to reduction of water consumption. Furthermore, water rights may not ease the “tragedy of the commons” and has led to more serious resource depletion due to rational growth and technical externalities (Clark, 1980). It is the focus of our study to examine the

3 From July to August 2017, we went to 40 villages of Inner Mongolia and Hebei Province to investigate and find that although the pilot of the borewells ban was implemented at the county level, the practical promotion was different for each administrative village. Therefore, based on the relevant provisions of the county policy documents on the local borewells ban, as well as the farmers’ awareness of the well drilling control policy in the survey, this paper constructs a sample of pilot villages and non-pilot villages of the reform of borewells ban. 9 impact of water rights reform through the controlled experiment in 40 villages of two provinces in northern China, both of which are main potato producing regions. In the experiment, water price was imposed in 11 and borewell ban in 23 villages out of the 40 villages. 8 of them are chosen as the pilot areas to implement both policies. We attempt to quantify the impact of water right reforms by focusing on two key mechanisms of plot-level irrigation water demand among potato farmers: (1) adoption of water-saving technologies, and (2) reducing the construction of new irrigation wells. The framework of the estimation comes as follow:

PolicyⅠ: Technology － Water price reform adoption － Water usage + － + PolicyⅡ: Borewells Water construction price Bans of borewells －

Policy Shock Farmer’s Behavior Outcomes

Figure 2. Theoretical Framework

The first mechanism starts with the water price reform. As water price reform increases the trading value of water resources, owners of irrigation borewells have the right to transfer the irrigation water (Bretsen and Hill, 2007), so they tend to sell the surplus water rights to other water users in order to obtain profits. When water resource scarcity leads to higher water price, borewell owners have the incentive to leave more irrigation water for sale by reducing water consumption or improving irrigation efficiency. For the owners of irrigation facilities, investment in water-saving facilities will help to reduce long-term irrigation costs and increase the revenue from the sale of remaining water resources.

In the second mechanism concerns the influence of borewell ban on the adoption of 10 agricultural water-saving irrigation technology. Borewell ban imposed both direct and indirect effects on water-saving irrigation by delimiting the scope of overexploitation area, strictly restricting or forbidding the construction of new irrigation borewells and shutting down invalid borewells. Strict restrictions on the construction of new borewells and management of borewells would reduce the exploitation and water consumption, thus restrict farmers’ access to irrigation water and finally force them to adopt water-saving irrigation technology. On the other hand, borewell ban has indirect effect. The scarcity of water resources and irrigation wells due to strict restriction of borewells drilling and water access push up the economic rent, which in turn has positive and negative impacts. The positive impact is that the opportunity cost of water increases with the economic rent of water and in turn encourages farmers to save water. It is also possible that increasing economic rent of water and borewells leads to excessive exploitation of groundwater in the short run. Farmers may even dig borewells regardless of the rules. In the case that the registration of borewell ownership is not in place and the borewells property is not clear, the negative impact would be even more serious.

Besides, if digging a borewell requires approval, even though households own the full property rights of the well, they are less likely to invest in water-saving technologies. The government’s approval might make households perceive the “privately owned irrigation equipment” as a public good and thereby does not respond to the incentives conforming to the reform. Thus, the concurrent acquisition of water resources also changes the institutional arrangement for water management in the investment areas. Given both the positive and negative effects, the water-saving effect of borewell ban warrants careful empirical investigation.

5. Data and Empirical Methods

5.1 Data source and descriptive statistics

Plot level irrigation water usage, existing and new irrigation borewells and irrigation

technology before and after policy reforms were collected through on-site surveys conducted

in 2007, 2012 and 2017. In 2007 and 2012, 617 households in 41 villages in five counties of

major potato production area in Hebei Province and Inner Mongolia were randomly selected.

502 potato growers were surveyed after interview. The questionnaire covered socioeconomic

variables including household structure, labor market outcomes, and credit information.

In 2017, 413 households of the previous sample are still planting potatoes. We included

them in the second survey to document their planting and irrigating behavior after the

implementation of the water price reform. We randomly selected potato growers in the same

villages to substitute the 89 samples missing in 2017. The effective sample size in 2017 is 499,

of which 289 from Inner Mongolia and 210 from Hebei Province. From 2007 to 2017, annual

attrition rate is 4.6%.

From the surveys, we construct a plot level panel dataset with 1,106 potato plots

operated by 413 households in 2007, 2012 and 2017. Village-level precipitation is used as the

proxies of average soil moisture. Annual precipitation, water shortage and other weather

variables are collected from the China Meteorological Administration database. Plot,

household, and village level controls are all obtained from the surveys. Table 1 reports

descriptive statistics in 2007, 2012 and 2017.

Table 2. Descriptive Statistics 2007 VARIABLES Definition N mean sd min max Wellcost Average cost of well construction 468 38.64 147.0 0 1,250 (yuan per meter) Waterquantity Average water consumption (tons per 434 63.12 187.3 0 3,000 mu) Wellnumber_village Number of borewells at village level 502 5.319 5.943 0 30 12

Policy1 Borewell ban policy 502 0.594 0.492 0 1 (0=untreated; 1=treated) Policy2 Water price policy 502 0.643 0.479 0 1 (0=untreated; 1=treated) Tech1 Flood irrigation 194 0.840 0.367 0 1 Tech2 Large sprinkler irrigation 164 0.006 0.078 0 1 Tech3 Micro spray irrigation 190 0.142 0.350 0 1 Tech4 Drip irrigation 166 0.018 0.134 0 1 Waterprice Average water price(yuan/ton) 302 0.303 0.862 0 7 Wellownership Ownership of the irrigation borewells 323 0.0310 0.173 0 1 (0=collective ownership; 1=shared or private ownership) 2012 VARIABLES Definition N mean sd min max Wellcost Average cost of well construction 452 17.80 67.31 0 833.3 (yuan per meter) Waterquantity Average water consumption 502 29.99 50.93 0 333.3 (tons per mu) Wellnumber_village Number of borewells at village level 502 9.665 11.39 0 60 Policy1 Borewell ban policy 502 0.594 0.492 0 1 (0=untreated; 1=treated) Policy2 Water price policy 502 0.647 0.478 0 1 (0=untreated; 1=treated) Tech1 Flood irrigation 243 0.560 0.497 0 1 Tech2 Large sprinkler irrigation 148 0.0494 0.217 0 1 Tech3 Micro spray irrigation 187 0.210 0.408 0 1 Tech4 Drip irrigation 180 0.181 0.386 0 1 Waterprice Average water price (yuan/ton) 462 0.125 0.699 0 7.111 Wellownership Ownership of the irrigation borewells 482 0.0207 0.143 0 1 (0=collective ownership; 1=shared or private ownership) 2017 Definition N mean sd min max Wellcost Average cost of well construction 492 48.61 146.5 0 1,636 (yuan per meter) Waterquantity Average water consumption (tons per 499 36.64 50.44 0 320 mu) Wellnumber_village Number of borewells at village level 499 35.48 33.36 0 160 Policy1 Borewell ban policy 499 0.601 0.490 0 1 (0=untreated; 1=treated) Policy2 Water price policy 499 0.647 0.478 0 1 (0=untreated; 1=treated) Tech1 Flood irrigation 261 0.261 0.440 0 1 Tech2 Large sprinkler irrigation 81 0.0498 0.218 0 1 Tech3 Micro spray irrigation 121 0.203 0.403 0 1 Tech4 Drip irrigation 195 0.487 0.501 0 1 Waterprice Average water price(yuan/ton) 338 1.034 2.632 0 33 Wellownership Ownership of the irrigation borewells 371 0.0431 0.203 0 1 (0=collective ownership; 1=shared or private ownership)

What are these variables? Any discussion? From Table 1, the average value of drip irrigation

(Tech4) in 2017 is much higher than that in 2012 and 2007 while the value of flood irrigation

(Tech1) decreases significantly in the past decade, indicating that the proportion of advanced 13 water-saving irrigation methods has increased as a whole. Because of implementation of water price in pilot areas since 2014, water price in 2017 is significantly higher than previous years. There’s an increasing trend of ownership structure (Wellownership_household) in 2017, indicating that farmers have incentives to get ownership of irrigation borewell.5.2 Uptake of water-saving technologies before and after the reforms Table 3 reports the timeline of water right reform of the five sample counties. The water right reforms and associated policy of charging rural households water-use fees for agricultural production started in 2014. More discussion? There are two main policies for water conservation. The first is water price or excessive water charge; and the second is strict management over groundwater exploitation, including borewell ban or borewell management. Generally speaking, the pilot projects of intervention of groundwater overexploitation was proposed by government of Hebei Province. However, considering Inner Mongolia was selected as one of the water right reform pilots, and have also implemented strict policies against groundwater overexploitation, we include the 5 sample counties from Hebei and Inner Mongolia in our unified analysis framework of groundwater overexploitation. Table 3 records the implementation of the reforms in 5 counties as well as the differences in the promotion of each specific policy.Table 3. Policy Change Process of the Five Sample Counties Province County 2015 2016 Water price reform are carried Kangbao County out in most villages Hebei Water price reform and borewell Province Zhuolu County ban are carried out in most villages Borewell ban is carried out in Water price reform is carried out Wuchuan County some villages in some villages. Inner Chahar Water price reform is carried out

Mongolia Youyizhongqi in most villages Water price reform are carried Siziwangqi out in some villages Due to water rights policy as well as technological progress, Chinese farmers’ awareness of water conservation has gradually increased recently. Figure 3 shows the growth of water saving irrigation area in the last decade as a trend line calculated by macro statistics. We also calculate the adoption ratio of the 4 kinds of water-saving technologies on the base of micro survey data, which is shown as the histogram in Figure 3. In the sample, from 2013 to 2017, percentage of flood irrigation among irrigated plots dropped from 69.5% to 30.5%, while drip irrigation increased from 25.8% to 74.2%. The adoptions of large sprinkler irrigation and micro spray irrigation have not changed much, specifically, from 47% to 53% and 52.6% to 47.4%, respectively. How about the water saving effect of the four technologies? It indicates changes of percentage of various irrigation technologies before and after water right reforms. Since the irrigation efficiency of flood, large sprinkler, micro spray and drip technology increases in turn, the rising trend in the adoption rate of water-saving technology in our sample data is similar to the macro data of the country proportion of water-saving irrigation 14

area.

% flood irrigation 70%

large sprinkler 60% irrigation

50% micro spray irrigation

40% drip irrigation

30% proportion of water saving irrigation area 20% to effective irrigation year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 area Data Sources: 1. The proportions of water-saving irrigation area to effective irrigation area (drawn as the blue line) come from China Rural Statistical Yearbook (2009-2018); 2. The percentages of four irrigation methods of the irrigated land come from author’s calculations based on sample data (2012 & 2017). Figure 3. Trends of the expand of water saving irrigation area in rural China; Different irrigation methods adopted by farmers within the sample

6. Model and estimation results

Employing the constructed panel dataset, this paper investigates the impact of the water price reform and borewell ban on farmers’ irrigation behavior. For doing so, we first quantify the impact of water price and adopted irrigation technology on water usage, both of which are already determined and thus not endogenous at this stage. The policy impact on water consumption comes from two channels: adoption of water-saving technology and reducing construction of new wells. We will separately identify the effect of each channel by specifying

the models for irrigation technology adoption ( 푇푒푐ℎ푛표푙표𝑔푦ℎ푡 ) and water price

(푊푎푡푒푟푝푟𝑖푐푒ℎ푡). The first equation is specified as follows:

푊푎푡푒푟푞푢푎푛푡𝑖푡푦ℎ푡 = 훼0 + 훼1푊푎푡푒푟푝푟𝑖푐푒ℎ푡 + 훼2푇푒푐ℎ푛표푙표𝑔푦ℎ푡 + 퐷ℎ + 푌푡 + 휀푖푣푡 (1)

Where 푊푎푡푒푟푞푢푎푛푡𝑖푡푦ℎ푡 and 푊푎푡푒푟푝푟𝑖푐푒ℎ푡is the average water consumption and average

15 water price for household ℎ in year 푡, respectively. 푇푒푐ℎ푛표푙표𝑔푦ℎ푡 are dummy variables for the three water-saving technologies. Specifically, the baseline group is flood irrigation, and the dummies are successively large sprinkler irrigation, micro spray irrigation and drip

irrigation. 퐷ℎ denotes the household-level fixed effect and 푌푡 is the year fixed effect. 휀푖푣푡 is the random error. Eqn. (1) is to quantify the impact of water-saving technology on irrigation water usage. The results are showed in Table 4.

Table 4 (1) VARIABLES Waterquantity waterprice -0.8478 (2.3793) tech2(large sprinkler irrigation) 8.1247 (39.9849) tech3(micro spray irrigation) -48.7396* (27.3101) tech4(drip irrigation) -60.2473** (29.1153) Household fixed effect YES Year fixed effect YES Constant 142.2095*** (42.9307) Adj. R2 0.4537 Observations 651 Number of households 318 Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

It shows that although the improvement of average water price or adoption of larger sprinkler irrigation does not lead to decrease in water consumption, adoption of micro spray and drip irrigation significantly reduces the consumption of irrigation water. Compared with flood irrigation, households with micro spray irrigation use 48 tons of water less and drip irrigation adopters use 60 tons less per unit of land.

Second, we applied a two-stage least square (2SLS) estimation to determine the policy

16 impact on water price. The first-stage regressions are about well construction of villages and households. While water price of a specific household is determined by total number of wells in the village and whether or not the household owns a well, both of which are endogenously determined together with the price as by the experimental design water price varies across villages to account for existing irrigation water usage. So we use previous number of wells in village and the two water policies as instruments for number of wells in villages; and we use average cost for constructing wells and water policies as instruments for number of wells in households. Eqn. (2) and (3) below are the first-stage equations.

1 푊푒푙푙푛푢푚푏푒푟푣푡 = 훽0 + 훽1푊푒푙푙푛푢푚푏푒푟푣,푡−1 + 훽2푊푎푡푒푟푞푢푎푛푡𝑖푡푦푣,푡−1 + 훽3푃표푙𝑖푐푦푣푡 (2) 2 + 훽4푃표푙𝑖푐푦푣푡 + 퐷푣 + 푌푡 + 휀푖푣푡

푊푒푙푙표푤푛푒푟푠ℎ𝑖푝ℎ푡

1 = 훾0 + 훾1푊푒푙푙푐표푠푡ℎ푡 + 푊푒푙푙푛푢푚푏푒푟푣,푡−1 + 훾2푃표푙𝑖푐푦푣푡 (3)

2 + 훾3푃표푙𝑖푐푦푣푡+퐷ℎ + 푌푡 + 휀푖푣푡

In the equations above, 푊푒푙푙푛푢푚푏푒푟푣푡 is the number of borewells in village 푣 and year

1 2 t, and its instruments are borewell ban policy (푃표푙𝑖푐푦푣푡), water price policy (푃표푙𝑖푐푦푣푡), the first order lag of numbers of borewells 푊푒푙푙푛푢푚푏푒푟푣,푡−1, and the first order lag of average water consumption 푊푎푡푒푟푞푢푎푛푡𝑖푡푦푣,푡−1 . 푊푒푙푙표푤푛푒푟푠ℎ𝑖푝ℎ푡 is ownership of borewells used by household ℎ in year t. The instrumental variables are the cost of borewell investment

푊푒푙푙푐표푠푡ℎ푡, previous year’s number of wells in the village and two policy variables. 퐷ℎ denotes the household-level fixed effect and 퐷푣 is the village-level fixed effect.

The second-stage regression involves the determinants of irrigation water price.

Specifically, we regress water price on number of borewells in villages and ownership of borewells in households with instrumental variables.

1 푊푎푡푒푟푝푟𝑖푐푒ℎ푡 = 훿0 + 훿1푊푒푙푙푛푢푚푏푒푟푣푡 + 훿2푊푒푙푙표푤푛푒푟푠ℎ𝑖푝ℎ푡 + 훿3푃표푙𝑖푐푦푣푡 2 (4) + 훿4푃표푙𝑖푐푦푣푡 + 퐷ℎ + 푌푡 + 휀푖푣푡

The difference-in-differences (DID) method is employed to exploit changes in water price as well as number and ownership structure of borewells inside the pilot villages.

푗 푃표푙𝑖푐푦푣푡 takes the value of one if the reform takes place in village 푣. Taking Eqn. (4) as an example, the average treatment effect of water price policy is captured by 훿4. We assume that the introduction of water rights reform was quasi-random after the household-specific time trend is included.

Table 5 reports the estimation results of the 2SLS model. The results for equation (4) show that water price is significantly improved as numbers of wells in villages grows.

However, if a household owns a borewell, the water price they paid would be significantly lower. We learn from the results of equation (2) that number of borewells at village level is significantly correlated with number of borewells as well as water consumption of the village in the past. The results of equation (3) shows that borewell ownership structures at the household level are affected only by cost of borewell investment. Households that have the ownership of borewells should have cost more than others to construct the wells.

Table 5. Mixed-process regression (2)xtreg VARIABLES Wellnumber_village(v,t) Wellnumber_village(v,t-1) 0.7435*** (0.0138) Waterquantity(v,t-1) 0.3470*** (0.0952) Post*Policy1 0.3554 (0.8050) Post*Policy2 -0.0631 (0.8438) Year fixed effect Yes Village fixed effect Yes Constant -2.8756* (1.5144) Observations 1502 R-squared 0.8919 Adj R-squared 0.8884 (3)Probit VARIABLES Wellownership_household(h,t) 18

Wellcost 0.0136*** (0.0038) wellnumber_village(v,t-1) -0.0055 (0.0079) Post*Policy1 0.5387 (0.4212) Post*Policy2 -0.1180 (0.4406) Year fixed effect Yes Household fixed effect Yes Constant -2.6183*** (0.6573) Observations 211 Pseudo R-squared 0.3252 (4)xtreg VARIABLES Waterprice(h,t) Wellnumber_village(v,t) 0.0068* (0.0039) Wellownership_household(h,t) -0.7265*** (0.2128) Post*Policy1 0.1511 (0.2297) Post*Policy2 1.9812*** (0.2295) Year fixed effect Yes Household fixed effect Yes Constant 0.7636*** (0.1692) Observations 707 R-squared 0.1866 Adj R-squared 0.1796 Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

Third, we estimate the equation of water-saving technology adoption behavior of the households with the difference-in-differences method, where we compare the household outcomes in villages with the reform in place to those who have not yet implemented the reform. The baseline regression equation characterizing the effect of the reform is:

1 2 1 푇푒푐ℎ푛표푙표𝑔푦ℎ푡 = 휃0 + 휃1푃표푙𝑖푐푦푣푡 + 휃2푃표푙𝑖푐푦푣푡 + 휃3푃표푠푡푡 + 휃4푃표푠푡푡 × 푃표푙𝑖푐푦푣푡 (5) 2 + 휃5푃표푠푡푡 × 푃표푙𝑖푐푦푣푡 + 퐷ℎ + 퐷푡 + 휀푖푣푡

Where the reform outcomes of household ℎ during the calendar year 푡, 푇푒푐ℎ푛표푙표𝑔푦ℎ푡, including flood, sprinkler, spray or drip irrigation technology that the household used at the plot. These outcomes are assumed to be affected by the water rights reform indicator

푗 푃표푙𝑖푐푦푣푡 taking the value of 1 if it was the treated village. 퐷푡 picks up any persistent pre-reform differences across villages. 푃표푠푡푡 is the year dummies indicating whether the year is before (푃표푠푡푡 = 0) or after (푃표푠푡푡 = 1) the reform wave. The household fixed effect

퐷ℎ, year fixed effect 퐷푡 and the disturbances 휀푖푣푡 constitute the composite error for every household.

The results are showed in Table 6. It indicates that water price policy has a significant and positive effect on households’ adoption of water-saving technology while borewell ban policy does not. Table 6 (5)Multinomial logit VARIABLES tech2 tech3 tech4 Policy1 -1.8937*** -0.6150* -0.9304*** (0.7097) (0.3165) (0.3593) Policy2 -2.0648*** -1.1219*** -1.1005*** (0.7055) (0.3106) (0.3402) Post 1.9513 1.0794** 3.9911*** (1.1874) (0.4545) (0.6331) Post*Policy1 0.9037 -0.6204 -0.0931 (0.8983) (0.4471) (0.4293) Post*Policy2 2.5852*** 1.4678*** 1.2822*** (0.9165) (0.4329) (0.3708) Year fixed effect Yes Yes Yes Household fixed effectt Yes Yes Yes Constant -3.2443*** -0.7080** -2.7632*** (0.9106) (0.3034) (0.5490) Observations 698 Pseudo R-squared 0.1774 Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

7. Conclusions

Based on the micro survey data of potato grower in five counties of Hebei Province and Inner

Mongolia Autonomous Region over the period 2007-2017, this paper evaluates the impact of borewell ban and water price reform on farmers’ irrigation water usage. Interesting results

20 emerge. First, the implementation of the pilot project has promoted farmers’ water-saving behavior, which is embodied in the adoption of water-saving irrigation technology and the reduction of irrigation water consumption. Second, the heterogeneous property structure of groundwater irrigation system also affects the policy outcomes, specifically, water price of the households who have own a irrigation system is much lower than those who use borewells of village collective ownership. The borewells ownership structure would further affect farmers’ technology adoption and water consumption behavior. Third, water price reform and the existence of water trading market among farmers lead to adoption of water-saving technologies. However, borewell ban itself does not have significant water saving effects.

Therefore, in order to promoting farmers’ water-saving behavior, it is of great significance to further clarify the property rights of groundwater irrigation system and formulate specific policies for borewells regulation according to the property rights structure of irrigation system in each pilot area. Besides, to improve the water-saving effects of the borewell ban policy, it is necessary to improve the water trading market. Combination of policies has better water-saving effects than a single policy.

As expected, water rights reform is found to reduce irrigation water usage. For individuals who did not adopt water-saving technology in previous years, the estimated reduction effect is much larger, because the newly adopted irrigation technologies, especially micro spray irrigation and drip irrigation, contributed to improving water efficiency. However, the water-saving effects vary across policies. For the two policies of water rights reform, we found that imposing water price leads to farmers’ responses in adopting water-saving technology and thus reduces the average irrigation water consumption. Surprisingly, in

21 contrast to water-saving technology, the other channel, water price, does not seem to have a significantly effect, which implies that water saving in pilot areas with only price policy tend to be offset by increased water consumption by new wells. Policy of borewell ban in short term does not have water-saving and efficiency-improving effects. Neither does it reduced number of borewells, because the former irrigation borewells are still in use of the same way as before.

Our estimates are relevant to on-going water policy reforms in northern China. Given empirical experiences of water rights reform in other developing countries, we anticipate interest in evaluations of its poverty reduction effects as well as the cross-policy substitution impacts of water rights related policies. Adoption of water-saving techniques and/or restriction of well construction to reduce water consumption require an enabling policy and an institutional environment that aligns the incentives of producers, resource managers and society, and provides a mechanism for dealing with trade-offs, which will be addressed in our future research.

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