This is another article that is now online. It won't become an open access document at this stage. I think its my best work to date, and hopefully it can clear up some issues associated with how state-contingent approach works and how annual and perennial decision makers respond to drought.
The article builds from my PhD by firstly introducing the demand response to a given supply of water and then builds this into demand responses for water in alternative states of nature, to explain how the price of water can transition from elastic to inelastic.
The article then develops a game against nature where there are two announcements concerning the water allocated during a drought state of nature and illustrates alternative risk profiles for irrigators when allocation is unknown. By introducing a maintenance volume (i.e. a minimum quantity of water to keep the crop alive) the paper then explains how water is a state-general input for perennial producers and a state-allocable inputs input for annual producers. This subsequently explains why perennial producers are willing to spend above the long-run choke price for water in order to preserve capital expenditure.
When uncertainty (i.e. water supply) determines the quantity of water supplied (and demanded) by alternative irrigators (perennial versus annual), we can reclassify state-general demands as 'risk increasing inputs' and state-allocable as risk reducing inputs of production.
Using state contingent analysis, we discuss how and why irrigators adapt to alternative water supply signals. Focusing on the timing of water allocations, we explore inherent differences in the demand for water by two key irrigation sectors: annual and perennial producers. The analysis explores the reliability of alternative water property right bundles and how reduced allocations across time influence alternative responses by producers. Our findings are then extended to explore how management strategies could adapt to two possible future drier state types: (i) where an average reduction in water supply is experienced; and (ii) where drought becomes more frequent. The combination of these findings is subsequently used to discuss the role water reform policy plays in dealing with current and future climate scenarios.