GROUND WATER PRICING: NASH COOPERATIVE BARGAINING MODEL
S.C. DEEPAK
03-09-2004
When playing a game, we ask ourselves " what should I do? " when observing the game being played, we ask ourselves " what will be the outcome of the game?" John Nash was the first to systematically address this more fundamental question of how a game will be played by "rational" players. Nash's answer paved the way for unified methodology that we find in social sciences today.
The Concept of Nash equilibrium
Nash equilibrium is a set of strategies (or actions) such that each player believes
that it is doing best it can, given the actions of its opponents. Since each
player has no incentive to deviate from its Nash strategy, the strategies are
stable.
Regarding the organizational character of groundwater markets, while the groundwater markets in parts of Gujarat have taken almost an agribusiness proportion with cash based commercial transactions involving water rent as well as extraction of unpaid farm services from the buyers. On the other hand, groundwater markets in the relatively abundant indo-gangetic regions appear to fall somewhere in between these two extremes displaying rather a mute form of commercial character.
Nash equilibrium in cooperative bilateral bargaining situation
A two person bargaining situation involves two persons, who have the opportunity
to collaborate for mutual benefit in more than one way. No action taken by one
of the individuals without the consent of the other can affect the well being
of the other one.
Price determination of water in groundwater markets
The absence of competitive markets in transaction of groundwater between owners
of private irrigation systems and non- owners is widely observed in developing
countries. Topography constrains the deliverable area of water when farmers
use field channel. Capacity of water pump length of conveyance facilities such
as pipelines also limits the deliverable area. Usually the owner and non-owner
in close location becomes a pair of seller and buyer for water transactions,
and the price is determined under bilateral bargaining between them. This implies
that the price is not necessarily a competitive one.
Price determination between sellers and buyers under bilateral bargaining
A common structure of their analytical framework is that a seller and a buyer
bargain over the price such that the profit the seller (buyer) receives from
the bargained price is no less than his reservation profit. The reservation
profit/ utility is defined as the utility that a party would get, in case of
disagreement; by the best alternative usage of his resource is currently in
use. The empirical results based on this framework show that price varies across
pairs depending on the individual characteristics of sellers and buyers that
determine their relative bargaining position and reservation profits.
The objective of this presentation
To explore the individual level determinants of groundwater price using
a bilateral bargaining framework, which takes into account the difference in
modes of contracts. Theoretically, they derive a reduced form groundwater price
function using Nash's cooperative bargaining model (Nash, 1950). A regression
analysis using a newly available dataset from Madhya Pradesh, where private
well irrigation systems have been proliferating.
Conclusions
o Price is determined in accordance with the cost of reservation and profit
from irrigation
o Individual-specific characteristics affect the unit water price.
o In addition to the effect from physical capital, human capital is also important
o Types of contracts also significantly affect water price
References