Do buyers have bargaining power? Evidence from informal groundwater contracts

Abstract

In developing countries, the emergence of informal groundwater markets is accidental rather than planned due to the water scarcity and supply-side constraints. It is less often that water markets are assessed for agents bargaining power and equity impacts. In this paper, I examine the relative bargaining power of sellers and buyers in informal groundwater markets in India. To understand the process of bargaining, a framed-field experiment is conducted with actual buyers and sellers in groundwater contracts. In the experiment, sellers and buyers make a series of choices between output-shared and fixed-price contracts under varied risk conditions, first individually and then jointly. I define bargaining power as the relative ability of the agent to influence the joint decision for their individually preferred contract type. I find that there is a large preference disagreement between sellers and buyers. Buyers have preferences for output-shared contracts while sellers’ choices are motivated by expected earnings. Using the random-parameter probit model, I show that sellers have relatively more power to drive the joint decision in their favour. Nevertheless, factors like interpersonal relationships between buyers and sellers, such as kinship ties, long contractual history, and higher education of buyers augment buyers’ power relative bargaining power.