Optimal subsidization for the adoption of new irrigation technologies.

Cost-sharing subsidies partially cover the fixed costs of water-saving technologies, promoting their adoption as one of the major irrigation water demand management tools that improve on-farm irrigation system efficiency and potentially free up more water for higher-value uses in water-scarce areas. In this study, we investigate the optimal subsidization scheme in the presence of adverse selection problems where the farmer's wealth is her private information using a theoretical model of a centralized regulatory structure. In the model, we show that the first-best investment levels can be implemented when the regulator has enough resources for subsidization. Otherwise, the outcome depends on which farmer – the high-wealth farmer or the low-wealth one – contributes more to the social welfare when confronted with their first-best investment levels. Particularly, the model's findings suggest that an optimal subsidization scheme might involve either high or low wealth farmer's investment level being downward distorted from their first-best levels. Furthermore, in some circumstances, if the wealth disparity is sufficiently large, it is optimal to subsidize high wealth farmers only. Overall, prioritizing economic efficiency may help conserve scarce irrigation water, but it may also conflict with social equity by denying some farmers access to public subsidies. [Display omitted] • We investigate the optimal subsidization scheme in the presence of adverse selection problems where the farmer's wealth is her private information. • In the regulation model, we show that the first-best investment levels can be implemented when the Water Authority (WA) has enough resources for subsidization. • If the WA has a limited budget for subsidization, the outcome depends on which farmer – the high-wealth farmer or the low-wealth one – contributes more to the social welfare when confronted with their first-best investment levels. • The results suggest that an optimal subsidization scheme could involve either high or low wealth farmers' investment levels being downwardly distorted from their levels. Furthermore, in some cases, if the wealth disparity is sufficiently large, it is optimal to subsidize high-wealth farmers only. [ABSTRACT FROM AUTHOR]