Alternative Policies to Manage Electricity Subsidies for Groundwater Extraction: A Field Study in Mexico

We designed a series of field experiments to study the behavior of farmers under alternative electricity subsidies for extracting groundwater. Users’ water pumping decisions are based on the price of electricity, level of subsidy, and height of the water table. The paper opens with a brief description of common pool resource dilemmas and the value of field experiments in the analysis of such issues. It then describes the model used to draw predictions. We analyze the theoretical effectiveness of three policy interventions: elimination, reduction, and decoupling—an innovative policy that substitutes the electricity subsidy for a cash transfer. Results from the experiments conducted in the city of León, Guanajuato, México, suggest that all three policy interventions sustain positive effects on the pumping level: Elimination has the largest effect, whereas reduction results in only a marginal effect on the rate of water extraction. Decoupling proves to be a viable policy, as it produces an effect similar to elimination while avoiding political and social damage. We then compare these results with lab experiments conducted in the United States.