This present set of three essays analyzes the effects of and possible solutions to a common problem in many countries, namely, the over-exploitation of groundwater due to implementation of pervasive subsidies for electricity used for pumping. It uses Mexico as an example of the consequences, and subsequently proposes solutions to this problem.

The first essay analyzes in a dynamic framework the effects of the subsidy and simulates different policy scenarios to analyze the possible outcomes of an eventual subsidy modification; this serves as the primary analysis that produces several testable hypotheses for our experimental work. Results from computer simulations for two different aquifers (León, Guanajuato and Kern County, California) suggest that elimination and decoupling have the same impact in reducing withdrawals from the aquifer and both interventions reach a less deep height to the water table. Using laboratory experiments, the second essay studies how the subjects determine their extraction decisions, conditional on different subsidy modification arrangements, we observe that the theoretical predictions suggest that elimination and decoupling the subsidy from the electricity price have the same effect and reducing the subsidy has a smaller effect when compared with the latter, the experimental results from the laboratory showed us that among the three policy interventions, decoupling the subsidy had the largest effect, this makes it a viable policy intervention when considering the political difficulties of eliminating or reducing a subsidy. The third essay will use the same model and experimental design described in Essay 2 to test the policy scenarios in the field, with actual stakeholders (farmers). Results show that farmers’ behavior follows the predictions of the model and differ from that of students in the impact of each policy intervention. In the field experiments elimination had the largest effect followed very closely by decoupling, and as predicted reduction had the smallest effect. These results support those obtained in the laboratory experiments where we observed decoupling as a viable policy intervention and a possible solution to groundwater over exploitation in the existence of pumping subsidies.