pricing unmetered irrigation water under asymmetric information and full cost recovery

The objective of this study is to define an efficient pricing scheme for irrigation water in conditions of unmetered water use. The study is based on a principal-agent model and identifies a menu of contracts, defined as a set of payments and share of irrigated area, able to provide incentives for an efficient use of the resource by maximizing social welfare. The model is applied in the case study of the Çukas region (Albania) where irrigation water is not metered. The results demonstrate that using a menu of contracts makes it possible to define a second best solution that may improve the overall social welfare derived from irrigation water use compared with the existing pricing structure, though, in the specific case study, the improvement is small. Furthermore, the results also suggest that irrigation water pricing policy needs to take into account different farm types, and that appropriate contract-type pricing schemes have a potential role in providing incentives to farmers to make irrigation choices to the social optimum.