Evaluating the influence of water bank on water market, farmer’s participation, and reallocation efficiency through agent-based modeling

Chronic water scarcity in many river basins has intensified the need for effective mechanisms to improve the allocation of water resources. Water markets are widely promoted as a means of reallocating water toward higher-value uses. Within this framework, water banks, functioning as intermediary institutions, can enhance market efficiency by facilitating transactions, managing fluctuations in supply and demand, and generating economic incentives. This study employs an agent-based model (ABM) to assess the effects of a water bank on market dynamics, farmer decision-making, agricultural value added, and broader economic outcomes in basin scale resulting from water reallocation among agricultural users. In the model, the water bank is represented as an autonomous, strategically behaving market agent operating alongside heterogeneous farmers. The model is applied to the Lenjan sub-basin of Iran’s Zayandeh-Rud River basin. Farmers' participation in the market, involving three crop types, namely barely, rice, and almonds, is simulated over the period 2000–2024 under three scenarios: no market (NM), a decentralized market without a water bank (NB), and a market supported by a water bank (WB). The results of these scenarios are then compared. The findings indicate that the water bank substantially improves market efficiency, sustainability, and allocative efficiency relative to the direct-transaction scenario (NB). Acting as an intertemporal buffer, the bank absorbed surplus water during wet years and released it during droughts, thereby reducing excess supply and demand imbalances by 54% and 61%, respectively. This buffering capacity mitigates market failures associated with the absence of storage-based intermediation. The presence of a water market clearly raises overall income up to 170%. However, the water bank also led to a fairer redistribution of profits among different farmer groups. The total value added per unit of water increased by 12% under the NB scenario and by 40% under the WB scenario, suggesting that the water bank enhances the economic efficiency of water allocation through its influence on price formation and its role in equilibrating supply and demand. In the water market, the bank purchased approximately 1210 million cubic meters of water and resold half, while retaining the remaining 600 million cubic meters in storage equivalent to 18% of total available water. This stored volume could potentially support environmental flows for the Zayandeh-Rud River, as well as meet industrial and part of the urban water demand in the region. These findings underscore that the value of a water bank lies not merely in facilitating trade, but in its capacity to transform competing claims on scarce water into coordinated, incentive-compatible reallocation. This provides evidence that strategic storage and institutional intermediation should be integral components of water market design.