DP13572 Inefficient water pricing and incentives for conservation
We use two randomized controlled trials in 544 villages of rural Bangladesh to study a simple water conservation technology called "Alternate Wetting and Drying (AWD)". The AWD technology is a perforated PVC pipe that allows farmers to observe the water level below ground and thus irrigate their field less often. Even though this technology has shown promising results in numerous agronomic experiments, we find no significant effects on water use and profits. AWD only leads to measurable water savings in villages where farmers pay a volumetric (marginal) price for water, but not in villages where water prices are set by the acre. Building on these findings, the second RCT randomly distributed debit cards that convert farmers from per-acre charges to hourly billing. The debit cards cause demand for AWD to become less price sensitive and farmers to put more value on the technology. Taken together, these results show that introducing a marginal price for water aligns incentives for conservation.
