Cooperation Against Theft

Water theft carried out by manipulating water meters constrains volumetric pricing in semi-arid regions. Cooperative management can reduce theft and improve incentives for efficient water use by inducing peer monitoring. Using a theoretical model, we show that theft is more likely when prices are high, punishments are weak, and cooperatives are large. We also show how cooperative membership and punishment levels are determined endogenously by constraints on monitoring. We test the model on data from Tunisia for the years 2001–2003, relying on instruments that proxy for unobservable monitoring costs. The results confirm that well-designed incentives can reduce theft, and that constraints on monitoring costs affect institutional design