Bargaining Over Environmental Budgets: A Political Economy Model with Application to French Water Policy

In decentralized water management with earmarked budgets financed by user taxes and distributed back in the form of subsidies, net gains are often heterogeneous across user categories. This paper explores the role of negotiation over budget allocation and coalition formation in water boards, to provide an explanation for such user-specific gaps between tax payments and subsidies. We propose a bargaining model to represent the sequential nature of the negotiation process in water districts, in which stakeholder representatives may bargain upon a fraction of the budget only. The structural model of budget shares estimated from the data on French Water Agencies performs well as compared with reduced-form estimation. Empirical results confirm the two-stage bargaining process and provide evidence for systematic net gains from the system for agricultural water users.