Abstract:
Many common resources are managed not with efficient regimes, but with crude ones, like quotas and bans. This paper studies how one such blunt policy, rationing the commons, shapes the efficiency and equity of agricultural groundwater use in Rajasthan, India. Using an instrumental variables strategy, based on the geology of groundwater, we quantify how farmer profits depend on water in the long run. Our estimates show that water scarcity sharply decreases farmer yields and profits. We apply our empirical results to calculate the optimality of the observed ration, six hours of power per day. Our results suggest that this stringent rationing regime for electricity is nevertheless not strict enough, and can only be rationalized by the government placing zero value on the future use of groundwater. We estimate a production function for farm output, explicitly accounting for water as an input in order to simulate the efficiency and distributional implications of counterfactual policy regimes.