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Water Allocation Between the Agricultural and the Municipal Sectors Under Scarcity: A Financial Approach Analysis

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Abstract

A model examining the National Water Wealth (NWW) and its allocation between the municipal sector and the agricultural sector, where water value is defined as the present value of Water Rights, is presented. Five factors are considered: (i) uncertainty of water supply; (ii) population growth rate; (iii) the effect of time on NWW without new water production; (iv) agency costs, and; (v) production of new waters. The work is based on the model by Jensen and Meckling (J Finance Econ. 3:305–360, 1976), dealing with the effects of agency costs on the value of public companies. Agency costs are subject to conflicting interests between managers, shareholders and bondholders. In the water economy agency, costs stem from a divergence of interests between the government, the agricultural and the municipal sectors. Uncertainty of supply reduces water wealth of both sectors, with a stronger adverse impact on water wealth of the agricultural sector. Our model shows how production of new waters can have contributive effects on national water wealth. The modeling demonstrates the option of reducing the overall uncertainty of water supply and production of new waters which leads to favorable effects on the national water wealth.

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Abbreviations

Cpdt :

Agency costs of debt

Cpgt :

Agency costs of owner’s equity

Cptt :

Total agency costs

Egwrt :

Expected groundwater recharge quantity

F:

The extent of the Water Commissioner’s lack of identification with the agricultural sector

Fx:

Maximal F for each period

Jr:

Constant ratio between the average discount rate for the two sectors (Rvt) and the discount rate of the municipal sector (Rmt)

Lunt :

Relative uncertainty of supply imposed on the agricultural

Nwht :

It is Nwwt including the present value of desalination

Nwwt :

National Water Wealth

Nwwt (Cptt):

NWW assuming agency costs

Pg:

Fixed positive rate of population growth

Qht :

Present value of desalination

Qhyt :

Annual constant average quantities of water generated from desalination

Qmt :

Water allocation for the municipal sector

Ragt (Cpgt):

Discount rate of the agricultural sector assuming agency costs of owner’s equity

Rat :

Discount rate of the agricultural sector

Rft :

Risk-free discount rate

Rht :

Discount rate of desalination

Rmt :

Discount rate of the municipal sector

Rmt(Cpdt):

Discount rate of the municipal sector assuming agency costs of debt

Rvt :

Weighted average discount rate of the two sectors

Rvt(Cptt):

Weighted average discount rate of the two sectors assuming agency costs

Va:

constant quantity of water per period allocated to the agricultural sector from the period t+1 onwards

Va(Cpgt):

Fixed average amount of water allocation per period (assuming agency costs of owner’s equity) for the agricultural sector from period t+1 onwards

Vgt :

Water quantity that the Water Commissioner sees as “his own”

Vot :

Water quantity that the Water Commissioner does not see as “his own”

Vot(Cpgt):

Water wealth of the agricultural sector assuming agency costs of owner’s equity

Wsat :

Agricultural sector’s share in Nwwt

Wsmt :

Municipal sector’s share in Nwwt

Wwat :

Residual water wealth of the agricultural sector

Wwat (Cpgt):

Residual water wealth of the agricultural sector

Wwht :

The weight of water wealth stemming from desalination out of NWW

Wwmt :

Water wealth of the municipal sector

Wwmt(Cpdt):

Water wealth of the municipal sector assuming agency costs of debt

Wwht :

The weight of natural water wealth out of NWW (including desalination)

α:

Water Commissioner’s relative identification with the agricultural sector

β:

Fixed positive coefficient

γ:

Fixed positive coefficient relation between μd and μg

ρ:

Fixed positive coefficient

μd :

Fixed positive constant

μg :

Fixed positive constant

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Authors and Affiliations

  1. Ono Academic College, Kiryat Ono, 5500000, Israel

    Erez Braude

  2. Faculty of Business Administration, Ono Academic College, Kiryat Ono, 5500000, Israel

    Shmuel Hauser

  3. The Department of Industrial Engineering and Management, Ben-Gurion University of the Negev, Beer-Sheva, 8410500, Israel

    Zilla Sinuany-Stern

  4. Zuckerberg Water Research Institute, Blaustein Institutes for Desert Research, Ben-Gurion University of the Negev, Kiryat Sde-Boker, 8499000, Israel

    Gideon Oron

  5. The Department of Industral Engineering and Management and The Environmental Engineering Program, Ben-Gurion University of the Negev, Beer-Sheva, 8410500, Israel

    Gideon Oron

Authors
  1. Erez Braude
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  2. Shmuel Hauser
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  3. Zilla Sinuany-Stern
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  4. Gideon Oron
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Corresponding author

Correspondence to Gideon Oron.

Additional information

Erez Braude passed away.

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Braude, E., Hauser, S., Sinuany-Stern, Z. et al. Water Allocation Between the Agricultural and the Municipal Sectors Under Scarcity: A Financial Approach Analysis. Water Resour Manage 29, 3481–3501 (2015). https://doi.org/10.1007/s11269-015-0986-y

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