A Novel Hydro - Economic - Econometric Approach for Integrated Transboundary Water Management under Uncertainty

Competitive use of transboundary waters across different countries and among different sectors can be approached as a stochastic multistage dynamic game. In this paper we use this approach to develop and apply a novel framework for optimal management of limited transboundary water resources and evaluation of different international strategies, under hydrological uncertainty. The Omo-Turkana River Basin in Africa is used as a case study application, since it faces the above challenges within the water-food-energy nexus framework. The basic mathematical model consists of the water balance (availability and demand for the different sectors), the costs of water extraction, and the social benefits from water resources. The non-cooperative and cooperative (Stackelberg "leader�follower") cases are solved and compared based on the future water availability. The empirical application of the model calls for sector-specific production function estimations, for which we employ nonparametric treatment of the production functions, while we extend it to allow for technical inefficiency in production and autocorrelated Total Factor Productivity, providing thus a more realistic model. For this purpose, Bayesian analysis is performed using a Sequential Monte Carlo/Particle-Filtering approach. The cooperative solution is the optimal pathway not only for both riparian countries, but for the sustainable water use of the basin too, as in future uncertainty conditions it maintains the maximum welfare option. The detail and sophistication of both the mathematical and econometric models are key elements for this novel approach, supporting robust policy recommendations towards sustainable management of transboundary resources.