Bargaining power and information asymmetry in China’s water market: an empirical two-tier stochastic frontier analysis

Abstract

China is committed to building a water-saving society, and one of the most important measures is to build a water market. However, after 10 years of development, China’s water market is still inactive. We analyze the bargaining mechanisms of water rights trading based on the theory of information asymmetry. We find that the information asymmetry between the two sides of the transaction will cause the actual transaction price to deviate from the fair price, and the one with more information has stronger bargaining power, which can plunder more surplus. In detail, the bargaining power of the buyer makes the price lower than the fair price by 32.68%, and the bargaining power of the seller makes the price higher than the fair price by 78.52%. The interaction of them finally makes the price higher than the fair price by 45.23%. The net surplus shows regional heterogeneity. The net surplus in the Central region is higher than that in the East and West, implying that sellers in the Central region have stronger bargaining power. Moreover, there are slight differences in the net surplus across the trade and market types. Empirical results demonstrate the importance of accommodating information asymmetry into the pricing of water rights.