Assessing water options trading willingness in irrigation areas with heterogeneous resource endowments

Abstract

Water options trading (WOT) is an effective way to promote efficient allocation of water resources and to manage risks of water scarcity. Scientific prediction information can help hedge the risks brought by uncertain hydrological and market environment to WOT. However, confronting with the prediction information, irrigation areas characterizing with heterogeneous resource endowments often exhibit different willingness in WOT. Therefore, through using prediction information, this study provides a novel perspective to assess the water option trading willingness (WOTW) in irrigation areas with heterogeneous resource endowments. Firstly, according to multi-objective optimization and expected utility theory, a three-phase dynamic adjustment model involving tradable water prediction, expected return analysis of WOT, and WOTW calculation is constructed and integrated. Then, based on three sets of comparative analysis data from 2014 to 2020 in five irrigated areas, the influence mechanism of heterogeneous resource endowments on the evolution, intensity and improvement potential of the WOTW is analyzed and the option contract with optimal water demand to motivate the WOTW in heterogeneous irrigation areas is proposed. The results of the case study suggest that the WOTW is largely affected by the matching equilibrium of water and arable land resources in irrigation areas. Larger water resource endowment per unit of arable land indicates smaller fluctuation of the WOTW evolution and greater intensity and improvement potential of the WOTW. Conversely, larger inter-annual variation of the water resource endowment per unit of arable land implies more inclination of the WOTW intensity in irrigation areas to be weakened, in which situation the irrigation areas prefer the option contracts with less water demand. This study provides a new method and theoretical foundation for the optimal allocation and options trading of agricultural water resources.