Three Essays on Groundwater and Tenancy Contracts in. Rural Economies

Transcription

1 Three Essays n Grundwater and Tenancy Cntracts in Rural Ecnmies Inaugural-Dissertatin zur Erlangung der Würde eines Dktrs der Wirtschaftswissenschaften (Dr. rer. pl.) an der Wirtschafts- und Szialwissenschaftlichen Fakultät der Ruprecht-Karls-Universität Heidelberg vrgelegt vn Anne Margret Steinmetz im Oktber 2003

2 t my parents 2

3 Table f Cntents 1 Intrductin Hw Infrmal Water Markets Functin: Empirical Evidence frm Suth India Intrductin The study area The sample Irrigatin and infrmal grundwater transactins in Nanguneri Taluk Sme qualitative features f infrmal grundwater transactins The share-buyers' views The cash-buyers' views The sellers' views The nn-transacting husehlds' view Interlinking between grundwater transactins and tenancy cntracts Cnclusin Appendix: Questinnaire Infrmal Grundwater Markets: The Rle f Share Cntracts Intrductin The structure f infrmal grundwater transactins The Mdel The General Mdel Expnential utility Lgarithmic utility The case f nly tw cntractual parameters Cnclusin Appendix

4 4 Different input intensities n wned and sharecrpped plts: The cnsequences f imperfect mnitring, cst sharing, and endgenus crp chice Intrductin Descriptin f the data The cst sharing argument Estimatin methds and empirical results Cmparisn f average input intensities n wned and leased-in plts Explaining the differences in average input and utput intensities Endgenus crp chice Cnclusin Appendix Table 1: Ttal peratinal landhldings f husehlds by tenancy status (in acres) Table 2: Irrigatin f plts by tenancy status Table 2a: Area irrigated under different tenancy cntracts (in acres) Table 3: Frequency table f crps by tenancy status (wner/sharecrpper) Table 4: Frequency table f crps by tenancy status (wner/fixed-rent) Table 4a: Prprtins f land grwn under different crps Table 5: Mean input intensities fr different crps (all plts in crp prductin schedule) Table 6: Results f the Sidak-test Table 7: Mean differences in average input and utput intensities Table 8: Differences n wned and sharecrpped land f wner-sharecrppers, withut cntrlling fr the cst share (n=43) Table 8a: Differences n wned and sharecrpped land f wner-sharecrppers, cntrlling fr the cst share (n=43)

5 Table 9: Differences n wned and leased-in land f wner-fixed-rent tenants, (n=75) Table 10: Multinmial lgit estimates fr the crp chice equatins Table 10a: Residence status f landlrds List f variables in the multinmial lgit mdel Table 11: Differences n wned and sharecrpped land f wner-sharecrppers, actual crp dummies (n=43) Table 12: Differences n wned and sharecrpped land f wner-sharecrppers, predicted crp dummies (n=43) Table 13: Differences n wned and leased-in land f wner-fixed-rent tenants, actual crp dummies (n=75) Table 14: Differences n wned and leased-in land f wner-fixed-rent tenants, predicted crp dummies (n=75) Table 15: Output differences (wner-sharecrppers) Table 16: Output differences (wner-fixed-rent tenants) Cnclusin References Acknwledgements

6 1 Intrductin Frm the viewpint f develpment ecnmics, missing r imperfect markets represent a crucial step in the understanding f the ecnmic prblems f develping cuntries. These missing r imperfect markets als lie at the heart f infrmal institutins, which are reactins t the market failures that arise because f legal, infrmatinal, r incentive cnstraints. These failures are ften exacerbated by an unequal distributin f incme r wealth. Anther essential prperty f imperfect markets is that they are cntagius: a market failure in sme sectr can lead t prblems in ther markets. Fr example, an incmplete credit market failing t prvide each husehld facing a rewarding investment pprtunity with a lan may lead t a failure in the market fr whse infrastructure the investment was ging t be made. One f these infrmal institutins designed t fill the lphles in imperfect markets are share cntracts. Instead f specifying a fixed payment, share cntracts make the payment t a prductin factr dependent n the - mstly uncertain - utcme f the prductin prcess in which that prductin factr is invlved. Share cntracts in the agricultural sectr f develping ecnmies are best knwn fr their use in cmbining the markets fr land and fr labur, but there is grwing evidence that share cntracts are als a cmmn cntractual frm in the emerging infrmal markets fr grundwater. The dissertatin in hand deals with share cntracts in bth the market fr land and the market fr grundwater. It is a daunting undertaking t cnduct research in the realm f share cntracts in agrarian ecnmies given the fact that the inquiry int the merits and drawbacks f share tenancy cntracts cmpared t fixed-rent leasehld tenancy started as early as in the eighteenth and nineteenth century with Adam Smith (1776) and Jhn Stuart Mill (1848), fllwed by a steady grwing literature investigating the efficiency implicatins f share cntracts and the reasns fr their existence. A large part f this literature is summarized in 6

7 Singh (1989), Otsuka et al. (1992), and Hayami and Otsuka (1993). But with that matters seem t have nt been settled because since then a new strand f literature has emerged, ffering new explanatins fr the chice f sharecrpping tenancy cntracts. 1 This literature, hwever, the recent ne as well as the lder ne, cnsiders nly land-tenancy and laburemplyment cntracts which 'are alternative arrangements t cmbine the tw primary factrs f prductin in agrarian ecnmies', as Hayami and Otsuka (1993) put it. This apprach leaves ut f cnsideratin that there is a third 'primary' factr f prductin, namely water, which fr a lng time might have been nt especially wrth cnsidering in the cntext f cntract thery, since the inter and intra village allcatin f this factr f prductin was gverned by cllective actin rather than by cntracts between private parties. But this has changed nwadays, since the use f grundwater fr irrigatin purpses is steadily replacing the use f surface water frm the ntriusly ill-maintained and therefre unreliable canal systems. Apart frm the canal systems being in bad cnditin, the fact that mre and mre farmers are grwing mre water-intensive crps als leads t an increasing demand fr grundwater, since the canal water supply des nt meet this demand. The equipment needed t gain access t grundwater is available t farmers wh have the necessary liquidity r access t credit. Since the access t grundwater makes thse farmers partly independent f the canal system, they face a smaller incentive t engage in the cllective maintenance f it. That in turn leads t a further decay f the surface irrigatin system, making mre farmers dependent n grundwater irrigatin. On accunt f the fact that nrmally part f the husehlds in a village cannt invest in the necessary equipment due t lack f liquidity and 1 T cite a few mre recent references: Basu (1992), Sadulet et. al. (1994), Sengupta (1997), Ray (1999), Ghatak and Pandey (2000), Ackerberg and Btticini (2001), Ray and Singh (2001), Dubis (2002). 7

8 credit-cnstrainedness, water has becme a factr f prductin the access t which is n lnger exclusively determined by rules set by the village cllective. It is nw rather a factr f prductin which is wned privately by sme f the husehlds and the allcatin f which therefre requires cntracting between private parties. Strictly speaking, there is nw a mixed regime f access t water: Fr ne part f their seasnal irrigatin needs, farmers still rely n surface water, fr the ther part, they have t rely n their wn wells r n ther farmer's wells. This is where the secnd and the third chapter f this dissertatin set in: The cntractual frms under which grundwater is traded between husehlds turn ut t be the same as thse emplyed t allcate the tw ther 'primary' factrs f prductin, land and labur. The tw main cntractual frms t cmbine grundwater with land and labur are that the farmer wh needs additinal irrigatin pays the seller either a fixed rate per unit f water he receives r a prespecified share f his utput n the field irrigated by the seller's well. The mainly bserved cntractual frms cmbining land and labur are, first, a fixed payment in cash r kind frm the tenant t the landlrd, secnd, a share f the utput prduced n the tenancy paid by the tenant t the landlrd, r, third, a fixed wage rate paid by the landlrd t the hired wrkers wrking n his fields. At this place, we will nt g int the details under which circumstances what kind f cntractual frm is chsen in land and labur transactins, the interested reader is referred t the literature cited abve. But there is ne bvius difference between the principal-agent relatinship in land-tenancy and labur-emplyment cntracts and the principal-agent relatinship in grundwater cntracts. Agency thery 2, n which the treatment f land and labur cntracts is based, cnsiders the chice f an ptimum cntract between a principal (the wner f a resurce) and an agent (the user f the resurce) 2 See, fr example, Arrw (1985), Hart and Hlmstrm (1987), Levinthal (1988). 8

9 and it is assumed that 'an agency prblem arises when the agent's actin (e.g. wrk-effrt) is nt directly bservable by the principal and the utcme is influenced nt nly by the agent's actin but als by uncertain factrs utside the agent's cntrl' (Hayami and Otsuka, 1993, p. 3). Things are different fr grundwater cntracts. First, the wner f the resurce, the wellwner, is under nne f the cntractual frms interested in mnitring the user's (the water buyer's) actins, since under a fixed rate cntract his payment is in any case independent f the buyer's actins and in the case f a grundwater share cntract, as matters stand, the cntract is nly negtiated when the buyer has already supplied all ther inputs, s that the wellwner can bserve the cnditin f the crp befre entering the cntract and persnally applying his resurce t the crp. Secnd, in the case f grundwater transactins it is the wellwner's (the resurce wner's) actins which are bservable fr the buyer but which are nt enfrceable by the buyer. Thus, there is a reversal f rles between the resurce wner and the resurce user, the user f the resurce having t prvide incentives t the wner f the resurce. The rle f grundwater is therefre, with sme reservatins, prbably best cmpared t the rle f labur in tenancy cntracts. Mre detailed infrmatin n the pattern f cntract chice in s-called infrmal grundwater markets is presented in chapter 2, which cntains the results f a field study n grundwater transactins cnducted by myself during January and February 2001 in Tamil Nadu, India. The main reasn which led me t undertake the study was the perceptin that the existing empirical literature n infrmal grundwater transactins, which is cited in the first sectin f chapter 2, is mstly based n studies which are n a rather aggregated level and therefre fail t prvide a satisfactry detailed depictin f the pattern f grundwater transactins and f the assciated payment mdes at the husehld level. But since these empirical details are vital fr a theretical investigatin f the determinants f cntract chice, infrmatin n such questins as the fllwing was gathered in the study: At which pint in 9

10 time during the cultivatin perid the cntractual frm is chsen? Is there any cnnectin between the remaining number f days in the cultivatin seasn fr which a farmer needs water and the cntractual frm chsen? Is it the wellwner wh dictates the cntractual frm and the terms f the cntract, r d the parties bargain ver the terms f the cntract? Once the cntract has been chsen, wh then decides hw much grundwater will be supplied, and hw much f the ther inputs such as labur, fertilizer etc. will be emplyed in the prductin prcess? Des a cntract with a wellwner assure a supply f grundwater, r is there n way f ensuring that the seller will deliver the amunt f water agreed upn in advance? The answers t these questin are f particular interest if ne wants t shed sme light n the fact that fixed rate payments and sharecrpping arrangements cexist in sme lcal water markets, but nt in thers. In additin, chapter 2 presents descriptive statistics fr sme characteristics f the sample husehlds and fr sme variables related t their grundwater transactins. The husehld characteristics include landhldings in the different categries f land, wellwnership, and the amunt f mney invested in irrigatin equipment. The variables related t the grundwater transactins are, fr example, the number f buyers and sellers transacted with in the seasn under cnsideratin, the fixed rate r crpshare paid r received fr grundwater, and the number f days fr which water was bught during the seasn. Cmparisns regarding these characteristics and variables are made between the three husehld categries sellers, buyers, and nn-transactrs, and between the tw sub-categries f buyers, cash-buyers and share-buyers. These descriptive statistics let ne gain sme insight int the factrs determining whether a husehld sells water, purchases water, r is inactive in the infrmal water market. In chapter 3, I cme back t the empirical facts set ut in chapter 2 in rder t build up a mdel capable f explaining the chice f different cntractual frms in infrmal grundwater markets. This task is definitely wrth undertaking, since n the ne hand, the 10

11 nly tw existing theretical papers n the issue, Jacby et al. (2001) and Kajisa and Sakurai (2000), investigate price discriminatin and mnply pwer in infrmal grundwater markets as well as the individual-level determinants f grundwater prices, but they d nt address which are the determinants f the chice f the cntract frm. On the ther hand, the literature n tenancy and labur cntracts mentined abve ffers a variety f explanatins why different cntract frms cexist in the same market fr land and labur, but it is clear that nne f the mdels emplyed in these cntributins can be used t predict cntract chice in infrmal grundwater markets, since the assumptins made in these mdels are nt necessarily cmpatible with the facts in existing infrmal grundwater markets. Amng the different appraches taken t explain the existence f sharecrpping arrangements in the tenancy market, the mdel in chapter 3 is mst clsely related t thse cntributins which use a bargaining apprach t explain the parameter values f individual cntracts. 3 In the cntext f infrmal grundwater transactins it seems reasnable t assume that the terms f the grundwater trade are the result f bilateral bargaining between the buyer and the seller. Empirical evidence suggests neither that all bargaining pwer rests with the water seller, which wuld permit the latter t set the terms f the cntract, nr that cmplete markets fr grundwater exist in which all participants take the price as given. Accrding t the empirical bservatins set ut in chapter 2, fr example, the bargaining pwer f each party depends n the amunt f water available frm the surface irrigatin system in the perid f the cntract, n the expected amunt f rainfall, and n the number f ther ptential buyers r sellers. Fllwing the pattern suggested by empirical evidence, I mdel the prcess f cntracting between a risk averse wellwner wh faces cnstant marginal csts fr the 3 Bell and Zusman (1976), Zusman and Bell (1989), Quiggin and Chambers (2001). 11

12 extractin f grundwater and a risk averse farmer wh is in need f additinal irrigatin as a three-stage game. At the first stage, during the grwing seasn, bth parties bserve the state f the farmer's crp and bargain ver the cntractual parameters, namely, a crpshare, a fixed payment per unit f water, and an unrestricted transfer payment. In the secnd stage, nature chses the amunt f rainfall, which is bserved by bth parties. In the third stage, the wellwner chses the amunt f grundwater he wants t apply t the farmer's crp, where the amunt f grundwater the wellwner delivers can be bserved by the farmer, but the farmer cannt cmpel the wellwner t deliver a certain amunt f water. Under these assumptins it is shwn that the cntractual parameters are chsen in such a way that the wellwner always chses the efficient amunt f grundwater and that there is always efficient risk sharing, regardless f incentive cnsideratins. If the utility functins f bth the buyer and the seller exhibit cnstant abslute risk aversin, the ptimal crpshare as well as the ptimal fixed payment per unit f water are functins f the cefficients f abslute risk aversin f the tw parties. Fr the case where bth parties have utility functins f the lgarithmic type, I can shw hw the cntractual parameters are influenced by factrs such as the buyer's and the seller's incmes frm surces ther than the cntract, the marginal csts f prducing the grundwater, and the distributin functin f the amunt f rainfall in the prductin perid. In a way, chapter 3 makes als a cntributin t the literature n cst-sharing arrangements in the cntext f sharecrpping cntracts. Braverman and Stiglitz (1986) shw that the reslutin fr the seeming paradx f the irrelevance f cst-sharing is an asymmetry f infrmatin cncerning the ptimal input use between the landlrd and the tenant. Under the assumptins f my mdel, in cntrast, cst-sharing arises because f the risk aversin f the cntracting parties cmbined with the unenfrceability f the input in questin, whereby 12

13 cst-sharing is feasible because the supply f the respective input is bservable by bth parties. Tw central results in chapter 3, the efficient supply f grundwater by the wellwner and the related result f efficient risk sharing between the buyer and the seller, can be nly derived because the input supplied by the water seller is assumed t be perfectly bservable (bservable at lw csts) by the water buyer. This assumptin is quite realistic, since there is n reasn why a farmer shuld be unable t bserve the amunt f grundwater supplied by smene else t his ne r tw field plts. In the case f tenancy and labur cntracts, hwever, it is nt s clear whether the wrk effrt f a hired laburer r a share tenant can be cstlessly mnitred by the landlrd. Cnsequently, there are essentially tw types f mdels dealing with cntract chice in land and labur markets. Under the assumptin f prhibitively high csts f mnitring the tenant's activities, the s-called 'Marshallian' apprach, the thery predicts that the chice f a sharecrpping cntract will result in an inefficiently lw amunt f variable inputs applied t the rented land by the tenant, cmpared t the amunt f variable inputs emplyed n wned land r n plts leased in under a fixed rent cntract. If, in cntrast, the landlrd is able t effectively mnitr the tenant's activities, as is assumed under the s-called 'mnitring ' apprach, then the efficient amunt f variable inputs per unit area can be stipulated in the cntract, and there are n incentive prblems t be dealt with, s that the cultivatin f a plt under a share lease causes n inefficiencies cmpared with wnership cultivatin r cultivatin under a fixed rent lease. Since the predictins f the thery cncerning such issues as the reasns fr the existence f sharecrpping arrangements and the efficiency f sharecrpping depend crucially n the assumptin whether perfect mnitring is pssible r nt, and since it cannt be settled theretically which f the tw mdelling appraches des mre justice t the real wrld, it is essential t take a clser lk at the empirical evidence. 13

14 In this cntext, the aim f chapter 4 is t make a cntributin t the existing literature in this field in the fllwing respects. First, we reestimate Shaban's (1987) mdel, using data frm a survey f 14 villages in Andhra Pradesh, India. A nvel feature f these data is that, fr each sharecrpping cntract, they cntain the accmpanying cst-sharing rules, s that we d nt have t rely n village dummies if we aim t measure the effect f the cntractual arrangement n input and utput intensities. In an imprtant extensin f Shaban's mdel, we include crp dummies int the analysis. If ne wants t cmpare an wner-sharecrpper's perfrmance n his wned and n his sharecrpped plts, ne has t average ver the inputs and the utput n all his sharecrpped and n all his wned plts, with the side-effect that ne als averages ver different crp types. But this seems t be undesirable, since it is natural t assume that different crp types are prduced with different technlgies, as was already mentined abve. This fact wuld nt cause a prblem if all types f crps were grwn in the same prprtins n wned and sharecrpped land. But if, as in this dataset, sme crps are mre extensively grwn n sharecrpped plts than n wned plts and vice versa, then nt cntrlling fr the crp type will lead t a distrtin f the estimatin results. In the light f this argument, Shaban's technique f using village dummies in rder t cntrl fr the effect f share tenancy seems t be questinable, since instead f reflecting nly the different cstsharing rules acrss the villages, these dummies culd just as well reflect different distributinal pattern f crp types n wned and sharecrpped plts between different villages. Indeed, we find that at least part f the differences between input intensities n wned and sharecrpped land can be ascribed t different crps grwn n these tw arrangements. We then extend ur analysis f the differences between input intensities n wned and sharecrpped plts t the class f wner-fixed-rent tenants in rder t investigate whether there are als differences between input intensities under the latter pair f arrangements, and 14

15 if there are differences, whether part theref can be ascribed t the effects f tenancy, r whether the ttal differences can be explained by plt-specific factrs r by different crpping patterns n wned and leased-in land. In this case, t, we find that different crpping patterns are ne reasn fr different input intensities. There is, hwever, a fundamental difficulty. If we emply indicatr variables in the estimatin fr whether r nt a crp is grwn n a particular plt f a particular husehld, we encunter the prblem that this set f crp dummy variables is nt exgenusly given, but is rather the result f an endgenus chice. If the chice f crps is endgenus and if the factrs which determine it enter int the errr terms in the estimatin f the equatins fr the input differences (all unbserved husehld hetergeneity which influences wned and leased-in plts differently), then nt cntrlling fr the endgeneity f crp chice will lead t incnsistent estimates fr the parameters in the input-difference estimatin. This presumptin is cnfirmed by the data at least fr the class f wnersharecrppers: In the mdel which assumes that the crp variables are exgenus, the estimated cefficients fr the crp dummy variables are highly significant, whereas the cefficients fr the cst share variable are nt significant at all. By cntrast, in the mdel which takes int accunt the endgeneity f crp chice, the influence f the crp dummy variables becmes less significant, whereas a statistically significant influence f the cst share variables can nw be detected. Chapter 5 summarizes the results and gives a shrt accunt f future research. 15

16 2 Hw Infrmal Water Markets Functin: Empirical Evidence frm Suth India 16

17 2.1 Intrductin Water is, besides land and labur, ne f the essential factrs in agricultural prductin. If there are regular rainfalls during the cultivatin seasn and if, in case that there is a perid withut rainfall, there are enugh perennial streams, pnds, r grundwater resurces, the farmers can affrd either because they are wealthy enugh r because they have access t credit - t buy and run the necessary irrigatin equipment, and if they can insure themselves against crp lsses, then these farmers d nt face any extrardinary ecnmic situatin which wuld be wrth cnsidering. But in a number f develping cuntries where agriculture is mnsn-dependent, a farmer wh wants t avid crp lsses caused by the failure f ill-maintained public irrigatin systems, r by the lack f rainfall, is ften driven t participate in an infrmal market fr irrigatin water, the reasns being missing r incmplete credit markets and the absence f perennial streams r pnds. The term 'market' is smewhat elastically in this cntext, fr what is bserved are persnalized cntracts where bth parties ften have few r n alternative partners t cntract, rather than auctin markets in a clearly defined gd which is traded at a cmmn price. The gd in questin is grundwater (the cntractual units are either hurs f irrigatin, area irrigated, r number f irrigatins) extracted by farmers wh wn a well and a pump-set. Describing and explaining the different payment mdes assciated with these grundwater transactins - especially the cexistence f fixed rate payments and share cntracts under which the buyer gives a share f his crp utput t the water seller in exchange fr the water received will be ne f the main tasks f this chapter. There are numerus cntributins dealing with the phenmenn f infrmal grundwater 'markets' in develping cuntries, all but tw f them (as far as I can determine) 4 4 The exceptins are Jacby/Murgai/Rehman (2001) and Kajisa/Sakurai (2000). 17

18 f a purely empirical nature. 5 Thse dealing with India "(a) prvide an idea f the magnitude and value f Indian water trading, especially at the natinal level, (b) utline the technical and institutinal envirnment within which Indian water markets are perating, (c) describe their majr ecnmic and institutinal features, (d) evaluate their efficiency, equity, and sustainability implicatins, and (e) suggest the legal and institutinal changes needed t make them an efficient institutinal ptin fr grundwater management" (Saleth, 1998). In my pinin, hwever, nne f these cntributins prvides a satisfactry detailed depictin f the pattern f grundwater transactins and f the assciated payment mdes at the husehld level. Mst f these studies are at a rather aggregated level and therefre fail t prvide the infrmatin that is necessary t set up a mdel capable f explaining the chice f different cntractual frms. This was the main reasn which led me t undertake the study whse results are presented here. My aim was t gather infrmatin n such questins as: At which pint in time during the cultivatin perid the cntractual frm is chsen? Is it the well wner wh dictates the cntractual frm and the terms f the cntract, r d the parties bargain ver the terms f the cntract? If the cntract has been chsen, wh then decides hw much grundwater will be supplied, and hw much f the ther inputs such as labur, fertilizer etc. will be emplyed in the prductin prcess? Des a cntract with a well wner assure a supply f irrigatin water, r is there n way f assuring that the seller will deliver the amunt f water agreed upn in advance. The answers t these questins are f particular interest if ne wants t shed sme light n the fact that fixed rate payments and sharecrpping 5 See, fr example, Saleth (1998), Meinzen-Dick (1998), Satyasai et al. (1997), Janakarajan (1993), Shah (1991). Empirical Studies fcusing n grundwater trade in Tamil Nadu's agriculture are Janakarajan (1991a, 1991b, 1994). 18

19 arrangements cexist in sme lcal water markets, but nt in thers. Since the same payment mdes can be fund in the markets fr tenancies, we will als have t investigate the questin whether the reasns fr the chice f a share cntract are the same in bth markets. T put it in anther way, can the existence f sharecrpping arrangements in bth cases be attributed t the same frm f market incmpleteness, such as a missing insurance r credit market, r by the incmpleteness f the grundwater market r the tenancy market itself. These are the questins t which the descriptive material in this paper can help prvide an answer. What this chapter cannt d, hwever, is t calculate the exact price f ne unit f water under the varius cntract frms and then cmpare them in rder t identify risk premiums r mnply markups. This is dne in the studies f Jacby et al. (2001) and Kajisa and Sakurai (2000). Due t the limitatins f the data, n attempt will be made t prvide an ecnmetric analysis f cntractual chice in infrmal grundwater markets r t test crrespnding mdels theref. Such an attempt has been made by Satyasai et al. (1997). Further, we d nt assess the extent f the trade in grundwater - the number f buyers and sellers invlved and the ttal mnetary value f the water traded as fund in Saleth (1998) and Janakarajan (1993). Nr is there an accunt f the degree t which grundwater is verexplited and the related lwering f the water table in the study area. Tw lder studies cncerned with these issues are Bhatia (1992) and Mench (1992). The remainder f the chapter is rganized as fllws: sectin 2.2 describes the study area, sectin 2.3 the sample. Sectin 2.4 presents sme summary statistics f trade in grundwater in the sample villages. In sectin2.5, we cmment n the details f sme grundwater transactins in the sample villages. Sectin 2.6 wraps up the chapter. 2.2 The study area During January and February 2001, 4 f the 7 villages frming a civil village r village panchayat in Nanguneri Taluk, Tirunelveli District, Tamil Nadu, were studied with special 19

20 emphasis n infrmal grundwater transactins. The panchayat is lcated in a rather drughtprne area, and is surrunded by 7 rain-fed tanks, which prvide the surface irrigatin water fr the s-called wetland. These tanks are filled during the mnsn seasn, and in years f gd rainfall, they are a reliable surce f irrigatin water until the end f February. Frm the tank, the water reaches the fields thrugh a system f small canals. The secnd categry f cultivable land is the s-called dryland, which has n access t tank water, and depends whlly n rainfall and grundwater irrigatin. The third categry is the secnd pririty land, which has access t irrigatin water nly every secnd year frm a nearby river, and which has n access t tank water and well irrigatin. In the alternating year, anther village panchayat has the right t take water frm the nearby river fr irrigatin purpses. In cnnectin with the rtatin f rights t water frm the river, the farmers tld us an interesting stry, which reminds ne f the state f affairs described by Wade (1979 and 1982). Despite the agreement with the gvernment ver the release f water every secnd year, the farmers cmplained that they had t bribe the gvernment fficials respnsible fr the distributin f the waters between the tw panchayats in rder t receive the water they were entitled t. There was strng cmpetitin between the villages in the canal system t have the canal utlets pened in their favur. The higher the bribe payments, the higher were the chances that the gate wuld be pened fr the village at the time when the farmers needed the water the mst. This cmpetitin fr the river water gave rise t a well-rganized institutinal arrangement: Guards wh had t take care that the river dams were nt brken by farmers f ther villages in rder t steal water, and the chice f tw farmers assigned t cllect the mney frm all ther farmers which was needed t pay the bribes and t pay fr the services f the guards. Fr each 0.8 acres f secnd pririty land a farmer cultivated, he had t pay a cntributin f 50 rupees. Thus, nce again, an inefficient thugh 'fair' - distributin system set up by the gvernment has been replaced by an illegal system based n 20