ASYMMETRIC INFORMATION AND THE PRICING OF NATURAL-RESOURCES - THE CASE OF UNMETERED WATER

This paper uses mechanism design theory to propose a mechanism to pric e irrigation water when farmers are heterogeneous in their production technologies (adverse selection) and their individual water uses are u nobserved (moral hazard). Unmetered irrigation water is often priced b y imposing per-acre fees on cultivated acreage or by charging per-unit fees on observable inputs or outputs. The offered pricing procedure i s based on the observed output and achieves a first-best outcome when implementation is free of transaction costs.