# 13-182/II (2013-11-08)

Harold Houba, VU University Amsterdam; Erik Ansink, VU University Amsterdam
river sharing, sustainable agreements, repeated sequential game, Folk Theorem, water allocation, renegotiation-proofness
JEL codes:
C73, D74, F53, Q25

Many water allocation agreements in transboundary river basins are inherently unstable. Due to stochastic river flow, agreements may be broken in case of drought. The objective of this paper is to analyze whether water allocation agreements can be self-enforcing, or sustainable. We do so using an infinitely-repeated sequential game that we apply to several classes of agreements.To derive our main results we apply the Folk Theorem to the river sharing problem using the equilibrium concepts of subgame-perfect equilibrium and renegotiation-proof equilibrium. We show that, given the upstream-downstream asymmetry, sustainable agreements allow downstream agents to reap the larger share of the benefits
of cooperation.