Our model represents the physical hydrological basin reality with a unidirectional water flow from upstream to downstream. Basin-wide water availability is determined by precipitation or water (in)flows. We distinguish two seasons: wet and dry, and two regions: upstream and downstream. In each region, water users are aggregated into three representative water uses: industry and households, hydropower generators, and agricultural irrigators. For simplicity of modeling, we aggregated fishing into hydropower generation because both use the instream function of water. We neglect navigation in this version of modeling because most part of the river is un-navig able. Transboundary flows from upstream to downstream are sensitive to changes in water use and storage management. Our model is built upon the work of Haddad (2011), in which both dam capacity and hydropower generation are considered, but we extend it by including other water uses (industrial and households, irrigation), flood damages, and wetland benefits or damages of saltwater intrusion. The model has an explicit representation of space (i.e., up-and downstream) and time (wet and dry seasons). We assume that irrigation takes place only in the dry season. As such, we are able to represent the detailed water balances in different seasons in different regions. Like Haddad (2011), our model is a static annual model in which two seasons are distinguished. The reservoir is filled in the wet season for usage in the dry season. Investment in dam capacity is therefore instantaneous, but we interpret it as long-term capacity. Specifically, during the wet season, upstream water resources can be used for industrial and household activities, storage for use in the dry season, hydropower generation that is reus able further downstream, and passing through a dam (if there is one) to downstream. Outflow from upstream in the wet season, which might cause flooding upstream, runs directly to downstream. During the dry season, water inflow plus the (fraction of ) stored water can be used for the similar purpose as in the wet season. River outflow in the dry season either can be used for irrigation or runs to downstream. Similarly, for downstream, water inflow plus the outflow from upstream can be used for the similar economic activities of industry and households, and hydropower generation. In the wet season, however, the river’s outflow may cause flooding and can be stored directly by farmers or in the reservoirs and used for irrigation in the dry season (further details can be found in Houba et al. 2011). Dam capacity is endogenous. The river basin, including water flows and uses in space and time, is presented in Figure 11.1. In the upstream-downstream case, upstream decisions may generate externalities affecting downstream water availability and the economic values. These externalities are positive to downstream when upstream stores more water in the wet season (i.e., reduced flood damage downstream), and negative when upstream decisions reduce downstream water inflow in the dry season, leading to

increased water scarcity and saltwater intrusion. Joint management of the MRB has to internalize all such externalities. Such management is currently lacking for the whole MRB. For decades, the World Bank, the Asian Development Bank, and other international donor organizations have been active in talks between the MRB’s governments about joint management of the MRB. One way to intervene is to introduce an exogenous budget (b) to provide stronger incentives for joint management of the MRB. Under such budget, each region would receive an additional external transfer, provided they reach an agreement on joint river management. The total economic value or welfare in each region is the sum of the net benefits (benefits minus costs) of water uses, plus the transfer received.