The river sharing problem with incomplete information

Abstract

This paper considers the river sharing problem with incomplete information. We ask whether the efficient allocation of water in a river network is possible when agents have private information on their satiation levels. First, we introduce a trading model on a tree network with incomplete information. Then, we focus on the river sharing problem for a three-agent river network in which water flows from two upstream agents to one downstream agent. We assume that each agent has a satiation point and this satiation point is his private information. We are interested in allocation mechanisms that map each profile of the satiation points to an allocation of water and a list of monetary transfers between the agents. We show that, if each upstream agent’s endowment of water is sufficiently larger than the downstream agent’s endowment, then there exists an incentive compatible, individually rational, and budget balanced mechanism that allocates the water efficiently.