Endogenous Technical Change and Groundwater Management: Revisiting the Gisser-Sanchez Paradox
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Traditional models of groundwater economics, as well as many current iterations of those models, assume that optimal aquifer depletion occurs with a fixed irrigation technology. As noted by Koundouri (2004), this assumption is one of several that contributes to the Gisser-Sanchez Effect (GSE), one of the most controversial theoretical/empirical results in groundwater management literature since it appeared in a seminal paper in 1980. The GSE states that economic benefits from managing the groundwater use for irrigation would be insignificant when the storage capacity of groundwater stock is relatively large and the demand for groundwater is highly inelastic. In this paper, we show that the elasticity of the groundwater demand curve decreases over time as increasing extraction costs drive movement to more efficient irrigation technologies. In addition, this shifting of the demand curve is even greater when incorporating a model of induced technical change through endogenous R&D expenditures. Using this model, we show that the GSE does not exist when the assumption of a fixed irrigation technology is relaxed.