Multiperiod Groundwater Markets

Abstract

Motivated by the emergence of local groundwater exchanges, we construct and analyze stochastic models of dynamic groundwater markets. Our primary focus is endogenizing the price formation and groundwater pumping strategies in a closed market with stochastic groundwater allocations and opportunities for intertemporal transfer through rights banking. In our model, several agents, interpreted as farmers or agricultural districts, make competitive decisions on water consumption to produce a basket of goods, as well as on trading allocations among themselves, or banking them for future periods. We define the respective discrete-time non-zero-sum non-cooperative game and construct its sub-game perfect Nash equilibria characterized by the groundwater price process $\{p^\circ(t)\}$. We furthermore construct an algorithm to determine equilibrium strategies and prices through a machine learning approach on top of best-response iterations. Extensive numerical experiments illustrate dynamic phenomena, including the role of groundwater recharge dynamics, agents' risk aversion and groundwater allocations. Our model provides insights into competitive effects in environmental markets with banking features.