Effects of competition on environmental water buyback auctions

As water extractions from the world’s rivers have grown, flows available for the environment have dwindled. In many parts of the world governments are now considering strategies to restore environmentalflows. One strategy is for a government to buyback water from irrigators for the environment withannual lease arrangements. In this paper we have studied the role of market competition (in terms ofenvironmental water demand and number of sellers) in determining the performance of multi-roundenvironmental water buyback auctions using a stylized agent based simulation model. The results sug-gest that rent extraction lowers as the number of bidders increase and water demand decreases. However,we find significant differences in the way changes in demand and supply influence rent extraction. Reduction in water demand has much greater impact on rent extraction than increasing the number of biddersin the market. Further, in wet years (when supply is abundant relative to demand) bidders engage in morecompetitive bidding compared to cases in dry years. Results from the analysis indicate that governmentagencies benefit more from arranging buyback tenders (1) with a small target relative to tenders with alarge bidder population and (2) with greater opportunities for the bidders to learn from the market inwet years compared to dry years.