Environmental Determinants of Cost Sharing

Multiple cost sharing rules often coexist in seemingly identical environments. We use shared irrigation costs as a context for examining the extent to which the structural environment explains the selection of a cost-sharing rule. We find that environmental factors affecting the costs and benefits derived from irrigation, as well as those determining the distribution of irrigators along the irrigation ditch, have impressive explanatory power. These results present the first formal empirical analysis of the manner in which structural features influence the actual cost-sharing choices of economic agents. Moreover, as the direction of this influence is consistent with the theoretical literature, our results also suggest that previous axiomatic studies are reflective of real-world cost-sharing behavior. JEL classification numbers: C71, D63, C25