Groundwater is an essential source of water supply worldwide, supporting human and environmental needs for water including agricultural, municipal, industrial, and habitat functions. It can be a primary source of water, or a supplementary one that serves to buffer against variability of rainfall or surface water availability in years of drought or scarcity. In either case, however, groundwater pumping can induce a number of negative environmental and social consequences, called externalities, such as depletion of aquifer storage, degradation of hydrologically connected surface water, seawater intrusion, well interference, and land subsidence (Bierkens & Wada, 2019). To curb such externalities, groundwater management agencies increasingly are implementing policies to manage and regulate rates of extraction (Gorelick & Zheng, 2015). Restrictions on groundwater use, called allocations, can and often have been designed with more inter-annual flexibility compared to typical surface water allocations. In the absence of significant built storage infrastructure (e.g., reservoirs), surface water supplies typically are highly variable from year to year (Ho et al., 2017; Pagano & Garen, 2005). Physical limits therefore exist to how much surface water can be diverted for irrigation in any given year in many regions. In contrast, groundwater resources generally respond much more slowly to inter-annual weather variability (Russo & Lall, 2017), providing natural storage that can be drawn down in dry years and recharged in wet years. Such physical differences in the temporal availability of surface water and groundwater have important implications for the design of allocations. In general, surface water allocations or rights in water-scarce regions impose fixed limits on withdrawals in any individual year or season. In contrast, groundwater allocations exhibit much greater heterogeneity in the time periods over which pumping limits are imposed. In some regions, groundwater allocations are imposed as strict annual or seasonal quotas in a manner identical to surface water, in which the allocation binds every year (hereafter referred to as a "hard cap"). Single-year groundwater allocations are observed in a number of agricultural regions within the western Abstract A common environmental externality of groundwater pumping is streamflow depletion. To manage impacts of groundwater pumping on hydrologically connected surface water systems, regulators often impose quotas, or allocations, limiting the rates of groundwater extraction. Allocations vary in their temporal flexibility, ranging from single-year "hard caps" to multi-year "soft caps". Soft cap allocations allow greater flexibility for farmers, the primary users of groundwater, to adjust irrigation rates from one year to another, potentially providing greater resilience to drought but also altering hydrologic impacts of pumping. In this study, we integrate agronomic, economic, and hydrologic models to evaluate optimal irrigation decisions for a range of equivalent hard and soft ...