Economics Job Talk

Abstract: Over 90% of global water use occurs in agricultural production, which is subject to two pervasive distortions: (i) incomplete property rights for farmers accessing water and (ii) subsidies, taxes, and tariffs affecting agricultural output. This paper combines a rich collection of global geospatial data with a dynamic spatial equilibrium model to quantify the impact of agricultural and trade policies on regional water scarcity and welfare. In the data, we show that water-intensive crops concentrate highly in water-abundant locations, implying a strong role for comparative advantage in governing global water use, though a small number of regions with very water-intensive production are losing water rapidly over time. In the model, we capture production, consumption, and trade in agriculture across many countries and crops, as well as the dynamic evolution of local water stocks as farmers extract from the common pool resource. We calibrate the model to match observed global patterns of agricultural production and hydrologic trends and use it to conduct counterfactual simulations of alternative policy regimes. We find that eliminating international trade in agriculture would dramatically increase water depletion across most of the world, and especially so in drier food-importing regions, resulting in large reductions in welfare over time. In contrast, other observed and hypothetical agricultural policy liberalizations have mixed effects on depletion that vary greatly across locations, suggesting nuance in implications for policy.