Water Rights Trading and Sustainable Infrastructure Financing: Evidence from China

Water infrastructure underpins progress toward Sustainable Development Goal 6 and SDG 9, yet financing shortfalls constrain investment in many developing economies. This paper examines whether market-oriented water allocation reform—specifically water rights trading (WRT)—can mobilize sustainable infrastructure financing. Exploiting China’s 2014 provincial WRT pilot as a quasi-natural experiment, we estimate difference-in-differences models using province-level panel data from 2010 to 2023 (an effective sample of 434 province–year observations across 31 provinces), supplemented by event-study analysis, mediation modeling, and heterogeneity tests. WRT raises per capita water infrastructure investment by approximately 18.3% (p < 0.01), with effects materializing gradually over three to four years and persisting thereafter. Three channels mediate the relationship: water resource value realization (average causal mediation effect, ACME = 0.062), financing cost reduction (ACME = 0.048), and marketization-driven investment incentives (ACME = 0.071). Treatment effects are more pronounced in water-scarce provinces and regions with stronger market institutions. These findings indicate that water market reform can unlock sustainable infrastructure financing, particularly when complemented by pricing reform, financial market development, and regionally tailored implementation.