Exploring the impacts of the inequality of water permit allocation and farmers’ behaviors on the performance of an agricultural water market

Water markets are considered as effective mechanisms to support efficient use of limited water resources and to increase crop production in agricultural systems. This study presents an agent-based modeling (ABM) framework to explore the performance of an agricultural water market under the joint influence of water permit allocation and farmers’ behaviors. The ABM employs a power law function to simulate water permit distribution among farmers for any given level of inequality measured by the Gini coefficient. Farmers’ irrigation behavior (i.e., sensitivity to soil dryness) and bidding behaviors (i.e., degree of rent seeking and learning rate coefficient) are explicitly incorporated into the ABM to represent farmers’ decision-making in a water market based on double auction. Through a set of scenario analyses in a study area in Texas, we find that the water market performance to increase basin-level crop production is constrained by a joint effect of, especially the complex and non-linear interplay between the inequality of water permit allocation, farmers’ behaviors, and hydrological conditions. The potential market performance is higher when water permits are more unequally distributed. The relative market performance is higher when the inequality of water allocation is at a moderate level. The modeling results can advance our understanding of the key contributing factors in market transactions, and provide policy implications to assess the comparative advantage between institutional development and farmers’ behavioral change for improving market performance. This study also provides model implications for future research to draw more robust conclusions about market benefits in the real world.