Irrigation, risk aversion, and water right priority under water supply uncertainty.

Abstract

This paper explores the impacts of a water right's allocative priority—as an indicator of farmers' risk‐bearing ability—on land irrigation under water supply uncertainty. We develop and use an economic model to simulate farmers' land irrigation decision and associated economic returns in eastern Idaho. Results indicate that the optimal acreage of land irrigated increases with water right priority when hydroclimate risk exhibits a negatively skewed or right‐truncated distribution. Simulation results suggest that prior appropriation enables senior water rights holders to allocate a higher proportion of their land to irrigation, 6 times as much as junior rights holders do, creating a gap in the annual expected net revenue reaching up to $141.4 acre−1 or $55,800 per farm between the two groups. The optimal irrigated acreage, expected net revenue, and shadow value of a water right's priority are subject to substantial changes under a changing climate in the future, where temporal variation in water supply risks significantly affects the profitability of agricultural land use under the priority‐based water sharing mechanism.