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In recent years, the proliferation of private well irrigation systems in South Asia, especially in the hard rock areas of India, has stimulated the growth of informal groundwater markets. These markets allow water-buying farmers, who are unable to invest in wells, to benefit from irrigation while enhancing the economic benefits of water-selling farmers. In this way, they have a positive impact on farm income. On the other hand, they are believed to have contributed to the problem of overexploitation of groundwater aquifers. This study examines the role of groundwater markets in determining the efficiency of irrigated farms. Technical, allocative and economic efficiency of groundwater-irrigated farms is determined, using a bootstrapped data envelopment analysis, and the determinants of the efficiency are explored using a bootstrapped truncated regression. For this purpose, data were collected from three different groups of groundwater-irrigated farmers: (i) a control group of 30 farmers who are neither selling nor buying groundwater; (ii) a group of 30 water-selling farmers; and (iii) a group of 30 water-buying farmers. The results demonstrate that there is substantial technical, allocative and economic inefficiency in the irrigated production due to overuse of inputs and that this inefficiency is higher among the control group farmers followed by water sellers and water buyers. Also in the second-stage regression, participation in the water markets is revealed as an important factor positively affecting efficiency scores. This shows that it is relevant for the government to make appropriate institutional policy interventions to capitalize on the benefits associated with the water markets, while at the same time, ensuring that the negative external effects are avoided. [ABSTRACT FROM AUTHOR]