The Economics of International River Basin Conflict and
Cooperation
Ines Dombrowsky
Helmholtz Centre for Environmental Research, Leipzig
Department of Economics
EAERE Pre-Conference Water Economics, June 24, 2009
The problem



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≥263 international river basins
Misfit of hydrological and political borders
Water uses may have transboundary effects and lead
to tension
State of the literature
Literature:

Contradictory predictions on conflict or cooperation

Ambiguous results of empirical research

Progress in explaining treaty formation, but a treaty does not yet
imply ‘cooperation’…
Gap: Explaining the tension of conflict and cooperation
Hypothesis:
taking an economic perspective…
… we may distinguish different types of problem structures in
international river basins reflecting different social dilemmas...
… and hence explain the tension!
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Outline
1. Externality problems in the use of international rivers
2. Analysis of negative unidirectional externality problems
3. Analysis of positive unidirectional externality problems
4. Conclusions
Page 4
1. Externality problems in the
use of international rivers
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Multiple water uses and +/- effects
Effect on
Water uses
Water
quantity
Water
quality
Water
regulation
Ecology
Water extraction for various uses
(-)
Wastewater discharge/pollution
(+)
(-)
(-)
Wastewater treatment
(+)
(+)
(+)
(+/-)
(-)
Hydropower generation
(-)
Navigation
(+/-)
(-)
(+)
(-)
Recreational uses
(-)
Fisheries
(-)
Flood control by dyke
(-)
(-)
Flood control by retention area
(+)
(+)
(-)
(-)
‘Consumption’ of forests,
wetlands & flood plains
(-)
=> Negative and positive unidirectional externalities
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Unidirectional vs. Reciprocal Effects
Transboudary River
Border River
Flow
Flow
Party A
Shared Lake/Sea
Party A
Party A
Party B
Party B
Party B
Unidirectional
externalities
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Reciprocal externalities
Typology of externality problems
Type of
externality
Unidirectional
Reciprocal
Negative
Type 1, e.g.
Water extraction upstream
Wastewater discharge
upstream
Type 3, e.g.
Water extraction from border
river, shared lake or shared
aquifer
Wastewater discharge into
border river or shared lake
Positive
Type 2, e.g.
Wastewater treatment
upstream
Flood retention upstream
Type 4, e.g.
Wastewater treatment at border
river or lake
Flood retention at border river
Source: Dombrowsky (2007a)
Incentives for cooperation?
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2. Analysis of negative
unidirectional externality problems
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E.g. Jordan River
Water extraction in Israel reduces
access to water in Jordan
negative unidirectional externality
Are there incentives for
cooperation and the realization of
mutual gains?
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Negative externalities: Coase Theorem
Coase (1960): Negative externalities may be internalized through side-payments in
bilateral negotiations if
 property rights are specified: laissez-faire or liability rule
 transaction cost are sufficiently low, including
- information costs
- bargaining costs
- monitoring and enforcement costs
International rivers:
 Property rights a priori not specified
 Imperfect information
 Bargaining over gains of cooperation
 No enforcing authority
 Sometimes > 2 parties
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Property rights: legal theories
Theory of absolute territorial
sovereignty (ATS)
= laissez-faire rule
Theory of absolute territorial
integrity (ATI)
= liability rule
Theory of limited territorial
sovereignty (LTS)
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= Equitable and
reasonable utilization
Property rights & negotiation outcomes
Case: Upstream appropriates the resource first
3 possible outcomes:
1.
Both accept absolute territorial sovereignty

Coasean agreement

efficient, not equitable
2.
B rejects absolute territorial sovereignty, A insists on it

No agreement/conflict

neither efficient, nor equitable
3.
Both accept limited territorial sovereignty

Agreement on property rights and sharing of efficiency gains

potentially ‘efficient’ and equitable
morally induced!
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The enforcement problem
Case 1: Upstream A and downstream B accept absolute sovereignty & side-payment
Assumptions:
Water extraction upstream
Ordinal preferences
C: cooperates, D: defects
B
pays C
A shares C
shares ¬ D
pays ¬ D
3,3
1,4
4,1
2,2
Enforcement required!
N
N: Nash Equ.
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Prisoner’s dilemma with sidepayment
3. Analysis of positive
unidirectional externality problems
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E.g. Blue Nile
Hydropower generation in Ethiopia
may entail flood protection for Sudan
= positive unidirectional externality
Under which conditions does
downstream have an incentive to
contribute towards an upstream
project?
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Upstream hydro-dam with downstream
flood protection benefits
Assumptions:
Hydropower benefits => Upstream country A
Flood protection benefits => Downstream country B
Case 1: Project is individually rational for upstream country A
Case 2: B’s participation leads to welfare improvement
Case 3: Project is only collectively rational
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Case 1: Project is individually rational
e.g.
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Project
a
Individually rational for A to
realize project a
Costs to A
2
B has no incentive to contribute
Hydropower
benefit to A
3
No cooperation!
Flood protection
benefit to B
0.5
Aggregated net
benefit
1.5
Case 2: B’s participation improves outcome
e.g. Project
alternatives
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a
b
Costs to A
2
2
Hydropower
benefit to A
3
2.5
Flood protection
benefit to B
0.5
1.5
Aggregated net
benefit
1.5
2.0
Project a is A‘s preferred
alternative
Project b allows realization of
gains of cooperation if:
Side-payment B->A
- Min: 0.5
- Equal sharing of gains: 0.75
Case 2: Game-theoretic reconstruction
Assumptions: see above, equal sharing of gains
B
A
Project b C
Project a D
pays C
pays not D
1.25,0.75
0.5,1.5
1.75,-0.25
1,0.5
N
N: Nash Equil.
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Prisoner’s dilemma with sidepayment
Enforcement required!
Case 3: Project is only collectively rational
e.g.
Project
c
Costs to A
2
Hydropower
benefit to A
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1.5
Flood protection
benefit to B
2
Aggregated net
benefit
1.5
Project c is
- not individually rational for A
- but collectively rational if:
Side-payment B->A
- Min: 0.5
- Equal sharing of gains: 1.25
Case 3: Game-theoretic reconstruction
Assumptions: see above, equal sharing of gains
A, B: contributes (C), does not contribute (D) to project c
Assurance Game
B
C
A
D
N
C
0.75,0.75
-0.75,0
D
0,-1.25
0,0
N
N: Nash Equil.
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Treaty is self-enforcing!
4. Conclusions
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Conclusions
Negative
unidirectional
externalities
Positive
unidirectional
externalities
Yes, but…
Depends
Agreement on property rights
Yes
No
Relevant information
Yes
Yes
Agreement on benefitsharing
Yes
Yes
Enforcement mechanism
Yes
Depends
Cooperation incentive
Cooperation dependent on:
2 notions of cooperation: Realization of mutual gains versus
equitable sharing of property rights
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Thank you!
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Negative Externalities: Coase Theorem
MB to A
MC to B
MBmax
MC MCmax
P
MB
0
qP
qmax
q: A‘s level of economic activity
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q