Cooperation Against Theft - A Test of Incentives for Water Management in Tunisia

This paper tests the contribution of institutions to the promotion of cooperative behavior, taking seriously the endogeneity of the institutions themselves. Theft of water by manipulation of water meters is an important constraint on the implementation of economic pricing policies, particularly in semi-arid regions of the developing world. We show how cooperative management institutions can reduce theft, improving incentives for efficient water use, by inducing peer monitoring by cooperative members. We show in a theoretical model that theft is more likely when prices are high, punishments weak, cooperatives large and the uptake of water-saving technologies low. However, cooperative membership, punishment levels and technology adoption are not exogenous but are chosen by cooperative members in response to conditions that themselves influence incentives for theft. We test the model on data from Tunisia, relying on instruments that proxy for unobservable monitoring costs to deal with the endogeneity of these proximate determinants of theft. The results provide strong confirmation of the ability of well-designed incentives to reduce theft, as well as of the tendency of individuals to adapt their behavior to the level of monitoring costs. Higher monitoring costs have a positive direct effect on the incidence of theft, and a further positive indirect effect by weakening the incentive for farmers to adopt water-saving technologies. But various features of the design of institutions can counteract these effects.