Abstract
Summary In many regions of the world, the timing between rainfall and the cropping season does not coincide creating the necessity for managing water resources. Although reservoirs and irrigation systems can usually guarantee needed water supplies for peak cropping periods within a single crop year, their risk-reducing effectiveness over a period of years can be diminished by annual rainfall and climate variables. The authors investigate a financial instrument based on river flow accumulations—irrigation insurance—to address drought-induced income shocks and water allocation problems. A stochastic simulation based on economic and hydrological characteristics of the Rio Mayo irrigation system in northwestern Mexico is used to study the concept.
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