Trading water along a river

A set of agents is located along a river. Each agent consumes certain amount of water he receives from his part of the river basin and may sell certain amount to his downstream agent if it is mutually beneficial. Water trading is restricted to two neighboring agents and an agent can only pass water to his downstream agent. We ask if this restricted trade to neighboring agents can implement an efficient allocation of water. We show that the efficient allocation of water can be achieved through the process of downstream bilateral trading. Specifically, we show that this one way “downstream” trading process implements the unique efficient allocation as well as a welfare distribution. We also show that the welfare distribution is in the core of the associated game of the problem. Moreover, we show that the coalition of agents upstream any agent obtains more welfare with the bilateral trading than with the downstream incremental distribution proposed by Ambec and Sprumont (2002) and less than with the upstream incremental distribution proposed by Ambec and Ehlers, 2008a and Ambec and Ehlers, 2008b.

Research highlights► We consider a river water trading problem. ► We study a downstream bilateral trading (DBT) mechanism. ► We show that the DBT mechanism implements the efficient allocation of water. ► We also show that the welfare distribution by the DBT is in the core of the associated game. ► The DBT distribution lies in the downstream incremental and upstream incremental distributions.