ECONOMETRIC ESTIMATION OF GROUNDWATER PUMPING COSTS - A SIMULTANEOUS-EQUATIONS APPROACH

Recent studies have attempted econometric estimation of the effect of changing groundwater costs on various dimensions of agricultural behavior. These studies assume parametric cost values, ignoring the possibility that marginal pumping costs may be endogenous to the extent of pumping activity. Under the alternative assumption of increasing marginal pumping costs, existing estimates of various elasticities may be suspect due to specification bias. This paper investigates this possibility, modeling a pumping technology based on hydrologic principles which incorporates constant pumping costs as a limiting case. The model also allows for common pool externalities when agents pump groundwater from the same aquifer. The results of the econometric analysis strongly suggest the presence of increasing marginal pumping costs for farmers in our data sample.