Does the trading of water rights encourage technology improvement and agricultural water conservation?

Although agricultural irrigation technology in China has been steadily improved for decades, the realized water conservation in the agricultural sector is not as good as expected. This paper examines whether water rights trading can encourage agricultural water conservation through technology improvement. Our fixed effects model specification confirms that water rights trading has a moderation effect on agricultural water conservation via technology improvement. We further identify that the moderation effect is driven by two forces which we label as the “revenue-driven” effect and “industrial water pressure-driven” effect. In general, the revenue effect drives farmers to improve the technology. However, the pressure from industrial water demand has more pronounced effects than the revenue-driven channel. Under the dual pressure of high industrial water consumption and low water endowment, farmers tend actively promote irrigation technology and reduce agricultural water use even if there is no revenue-driven effects. In addition, this paper reveals the existence of bottleneck on the moderated technology improvement, due to the reduced capacity on water rights supply in the agricultural sector.