Project by Chandra Kiran:
There is a vast literature on groundwater management when recharge is stochastic and when demand is known. Given the developed country setting of this literature, there is no corresponding focus on stochastic demand, especially when demand is a function of the price of crops. In a setting with high price variability, we illustrate that it is important to account for this source of uncertainty, for two reasons: first, the magnitude of this uncertainty can easily exceed that of natural recharge and second, the implications for risk averse farmers of multiple sources of uncertainty is substantial. In particular, the effect on steady state distribution of groundwater stock of increases in variability are very uncertain. We provide conditions under which increases in uncertainty lead to reduction in optimal withdrawal.