Improving the performance of agricultural temporary water markets: The role of technology-based and transaction-based subsidies

Water markets are increasingly advocated for combating agricultural water scarcity. However, in developing countries’ arid and semiarid regions, water market performance is greatly weakened by the insufficient demand-side and supply-side driving forces stemming from farmers’ limited awareness and capacity. Building an agent-based model and taking Hami City, Xinjiang in northwestern China as the case study area, this study explores the roles of technology-based and transaction-based subsidies in adjusting market driving forces and promoting the performance of agricultural temporary water markets. The results show that, without government support, water transactions are limited to only 8.054×10 3 m 3 , which can hardly protect agricultural interests. However, with improved market driving forces, water transactions can be substantially increased—potentially exceeding 100×10 3 m 3 —by technology-based and transaction-based subsidies This effect is particularly evident when the technology-based subsidy induces water shortages for recipients (e.g., retrieve 5820 m 3 /ha water entitlements) and its acceptance rate is below 50 %, and when the transaction-based subsidy approaches the average opportunity costs of selling water for traditional irrigation farmers (0.462 RMB/m 3 ). Combinations of technology-based and transaction-based subsidies prove to be more cost-effective in improving water market performance and protecting agricultural benefits, owing to the enhanced market driving forces and the promoting effect of transaction-based subsidies on the implementation of technology-based subsidies. This promoting effect also helps to alleviate fiscal burdens. Furthermore, results indicate that irrigation technology promotion and water markets are complementary, and their dynamic interaction can facilitate the gradual transformation of irrigation practices in arid and semiarid regions of developing countries. • Role of technology- and transaction-based subsidies in improving water market performance was analyzed. • An agent-based model was built to analyze subsidies’ effects and water market performance. • Transaction-based subsidies can promote the implementation of technology-based subsidies. • Combinations of the two subsidies can achieve higher agricultural benefits with less fiscal expenditure. • Irrigation technology promotion and water market development are complementary.