Corruption versus efficiency in water allocation under uncertainty: is there a trade-off?

In the absence of a cooperative solution to the problem of rights over shared water, water allocation through third-party intervention is most commonly used. This paper considers water allocation within a federal set-up with the requisite legal institutions to enforce third-party adjudication and tries to capture the politically charged motivations that often guide such allocations. It compares two mechanisms generally used by central planners to allocate water between up- and downstream regions, namely fixed and proportional allocation rules. By considering a corrupt central planner, this paper models the underlying political manoeuvring that drives the assignment of water rights. It is found that the politically pliable central planner’s choice of allocation rule depends on the expected state of nature. Interestingly, the corrupt central planner’s equilibrium choice of allocation rule turns out to be efficient, unless the problem of severe water scarcity is expected to occur.