Assessing the option water‐saving willingness of irrigation areas considering farmers’ risk tolerance

Abstract

Water option trading could facilitate water conservation in irrigation areas to achieve optimal allocation of agricultural water resources. However, the risk associated with water‐saving decisions increases due to the uncertainties of tradeable water and water‐saving benefits, which makes farmers in the irrigation area with heterogeneous risk tolerances exhibit varied option water‐saving willingness (OWSW) in response to the water option contract. Thus, this article provides a novel framework for prior assessing the OWSW in the irrigated area that considers farmers’ heterogeneous risk tolerance and proposes the optimal contractual water demand to stimulate the OWSW. First, a multiobjective optimal allocation model for cropping water is constructed to predict tradeable water, and then risk trust, risk‐return perception and reference are integrated into water‐saving return analysis for proposing a willingness calculation model involving forecast information. Finally, the influence of heterogeneous risk tolerance on farmers’ water‐saving path choices and the irrigation area's OWSW is analyzed with three sets of comparative data from 2014 to 2021. Results indicate that the intensity and stability of OWSW in water‐scarce irrigation areas increase as farmers’ risk tolerance rises, but the enhancement utility exhibits a diminishing marginal trend. When both prediction accuracy and farmers’ risk tolerance are low, contracts with relatively adventurous and differentiated water demands are more likely to stimulate OWSW. This study provides insights into activating water options trading and stimulating water conservation in agriculture from a risk management perspective.