Agricultural water trade under farmland fragmentation: A simulation analysis of an irrigation district in northwestern China

• Designs an intra-agricultural water market model with farmland fragmentation.
• Shows that fragmentation has an upward price-shifting effect.
• Argues that water markets should be tailored to local farming situations.

Agricultural water trade has been adopted in many countries as a measure to overcome water deficiency facing irrigated regions. When correctly applied, the system can allocate more water to more productive farmers, thereby improving efficiency in resource utilisation. Despite this enormous advantage, the water trading scheme set up in Zhangye City, of China's arid northwestern region, is being virtually ignored by local farmers, with the penetration rate standing at less than one percent of the total water use. To investigate the reasons behind the system's malfunction, farmers, farmers’ associations, and relevant governmental agencies were extensively interviewed. Then, based on the information collected from the field, a nonlinear programming model replicating the local water market was constructed. The modelling analysis showed that the solutions for the farmer's optimisation problem, hereby simulated under geographically scattered plots that are typical in the study area, are significantly different from those derived under the assumption of single plot operations. The optimal level of price intervention also differs for the two operations, as the fragmentation of farmland induces additional water demand. This result reiterates the importance of market designs that are tailored to local situations, and the danger of unconditional acceptance of economic institutions that are prevalent and successful elsewhere.