An Inﬁnite Horizon Contract for Demand Management in Urban Water Systems with Two Consumers
In public utilities, under supply constraints, fairness considerations introduce negative externalities and lead to market failure. Coase theorem states that the bargaining process can eliminate any ineﬃciency due to externalities. This paper characterizes an inﬁnite horizon contract with two consumers, within the agency theory framework, that replicates the inﬁnite horizon alternating bargaining model to mitigate the market failure due to fairness considerations. The concept of ﬁrm supply is introduced in urban water supply systems. Firm supply is the largest quantity of water available that is dependable at all times. The paper discusses the fair allocation of the ﬁrm supply between the consumers; and the consumers are induced to consume water at their allocated shares in each time-period based on the incentives oﬀered by the public utility. The dynamic contract, presented in this paper, is shown to be economically eﬃcient and achieves both endstate and procedural fairness.
R K. Amit and Parthasarathy Ramachandran. 2009. "An Inﬁnite Horizon Contract for Demand Management in Urban Water Systems with Two Consumers" The Selected Works of R K Amit
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