The welfare implications of transboundary storage and dam ownership on river water trade

Abstract River water trade is a method for reallocating water among riparian states in an efficient and self-enforcing fashion. In this study, we investigate the functioning of river water markets when the upstream state has the ability to build dams. Using a two-agent model, we describe the implications that dam ownership can have on agent welfare as well as on social welfare. We introduce and discuss the concept of strategic storage in river sharing problems, which refers to the withholding of water by the upstream state exclusively for the purpose of trade. We investigate the conditions under which an agent would resort to such a behaviour. We show that having such strategic storage creates a welfare loss for the downstream agent and also results in the loss of social welfare. As an empirical illustration, we study the allocation of the Cauvery river water to agricultural users and municipal users located upstream and downstream of the Krishnaraja Sagar (KRS) dam respectively.