Weather Derivatives and Water Management in Developing Countries: An Application for an Irrigation District in Central Mexico

This paper analyzes possible improvements to water allocation from introducing weather derivatives as an insurance instrument in irrigation districts with no water markets and two cropping seasons. Dry-season production depends completely on irrigation, while wet-season production depends on irrigation as a supplement to naturally occurring precipitation. Using an analytical model of water allocation and historical data from an irrigation district in Central Mexico, simulations show that weather derivatives could encourage interseasonal reallocation of water from wet to dry season, generating new Pareto-optimal water allocations that improve overall welfare among producers.