It has been suggested that trans-boundary water conflicts may be resolved through benefit sharing. The idea of benefit sharing is that a zero-sum game of water sharing is replaced through a positive-sum game of benefit sharing. In order to test the benefit sharing hypothesis, this paper presents a conceptual analysis of the incentives and institutional prerequisites required to realize mutual benefits in the use of trans-boundary rivers.

The paper argues that it is useful to distinguish negative and positive unidirectional externality problems related to the use of trans-boundary rivers, as these two cases represent fundamentally different cooperation problems. In the case of negative externalities, the benefits of cooperation exist in principle, but their realization requires an agreement on often disputed property rights as well as on the set up of an enforcement mechanism. Thus cooperation remains institutionally demanding. In contrast, in the case of positive externality problems, no property rights issues are involved. However, whether cooperation can be expected depends on the underlying payoff structure. The downstream riparian can be expected to participate in the provision of a positive externality upstream, either if the project is only collectively rational (coordination problem) or if the downstream riparian's participation allows for a Pareto improvement vis-à-vis the non-cooperative solution (cooperation problem). Given the property rights implications of negative externality problems, it may be useful, where possible, to refocus from negative to positive externality problems.

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