Hedging the risk of hydrological drought in irrigated agriculture: the role of precautionary savings

ABSTRACT

This paper explores the viability of precautionary savings as a hydrological drought risk management instrument in irrigated agriculture. To that end, first, the drought savings account (DSA) is proposed as a personal savings account to which farmers make regular contributions, with withdrawals allowed in the event of water supply gaps to guarantee a minimum income. Second, the implementation of the proposed instrument is empirically assessed in an illustrative case study using an innovative simulation approach. Results obtained suggest the DSA is actuarially sound, supporting its implementation as a cost-effective instrument to hedge hydrological drought risk.

KEYWORDS:

• Irrigation water supply gap
• drought savings account
• hydro-economic stochastic modelling
• stochastic dominance analysis with respect to a function
• Spain

Acknowledgments

The authors are particularly grateful to the anonymous reviewers for their very helpful comments on a previous version of the paper.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. The full simulation results for every $t$ in any policy scenario considered are available from the authors upon request.

2. The full descriptive results for the 18 scenarios considered are available from the authors upon request.

Additional information

Funding

This work was supported by the Ministerio de Ciencia e Innovación and the European Regional Development Fund [grant number RTI2018-095407-B-I00] (IRRIDROUGHT); and by the Consejería de Economía, Innovación, Ciencia y Empleo, Junta de Andalucía and the European Regional Development Fund [grant number UCO-1264548] (FINAGUA).