Handbook of Water Economics
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Handbook of Water Economics

Edited by Ariel Dinar and Kurt Schwabe

Water scarcity, whether in the quality or quantity dimension, afflicts most countries. Decisions on water management and allocation over time, space, and among uses and users involve economic considerations. This Handbook assembles research that represents recent thinking and applications in water economics. The book chapters are written by leading scholars in the field who address issues related to its use, management, and value. The topics cover analytical methods, sectoral and intersectoral water issues, and issues associated with different sources of water.
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Chapter 15: Experimental economics and water resources

Hernán Bejarano and James Shortle


Experimental economics uses controlled decision-making environments with human subjects to collect data to test fundamental economic theories and to analyze individual and collective economic choices in actual and counterfactual settings. The method was originally developed by Vernon Smith, who won the Nobel Economics Prize for ‘having established laboratory experiments as a tool in empirical economic analysis, especially in the study of alternative market mechanisms’. Smith’s work, and that of other pioneers, has demonstrated that experiments are useful for a variety of economic questions, with the method now routinely used to test economic theory (Plott, 1982; Smith, 1989), inform policy-making (Norman and Ricciuti, 2009) and record empirical regularities describing how culture, moral values and other psychological factors influence economic choices (Kahneman and Tversky, 1984; Henrich et al., 2001). Experimental economics research contributes to water resource economics on two levels. One is applications that are not specific to water but that advance fundamental economic understanding of individual or collective behaviors, motives, preferences, or policy mechanisms relevant to economic analysis of water economics and policy. Examples include experiments to understand how formal and informal institutions affect natural resource allocation (e.g. Ostrom, 2006), to improve the elicitation of willingness to pay for environmental goods (Shogren, 2005; Harrison, 2006), and to design voluntary resource conservation incentive mechanisms (e.g. Parkhurst et al., 2002; Ferraro et al., 2011; Banerjee et al., 2012, 2014). The second level is experiments that are specifically directed at water resource questions.

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