Independent Games in the First Stage

A Water Game

China's water resources can be used for industrial and household activities during the wet season and then stored for use in the dry season. China's outflow in the wet season fosters local fish reproduction before it runs to the mainstream of the LMB downstream. During the dry season, water inflow plus the stored water can be used for similar purposes as in the wet season and outflow from the dams can also be used for irrigation. For the tributaries of the LMB, water inflow can be used for similar economic activities as in China; water flows in the LMB are similar to those in the UMB, except for the impact of dams on the flow of tributaries.

Water inflow for the mainstream LMB solely consists of the outflow received from China. In each region (UMB and LMB), the economic values of water use are determined by aggregating four main activities for each season (wet and dry) (for details, see Houba, Pham Do, and Zhu 2013): (i) dam capacity for hydropower generation and mitigation of flood damage, (ii) industrial and household activities, (iii) irrigated agriculture, and (iv) environmental services or damages (i.e., wetland benefits or damage from saltwater intrusion in the estuary during the dry season). From the annual economic net values under cooperation and non-cooperation, a water game can be determined as shown in Figure 26.1 (first stage). In the water game, the dominant strategy is either not to share water (i.e., upstream) or not to pay for the water (i.e., downstream), because sharing or making side payment always costs China/LMB some welfare reduction. The total basin level annual incremental welfare gains are US$2.05 billion (i.e., 24.81-22.76) for moving from noncooperation (22.76) to cooperation (24.81) under weak governance, and US $0.05 billion (24.81-24.74) under strong governance. In general, LMB nations can obtain almost the same joint welfare with strong governance, regardless of China's situation. If LMB nations act individually (non-cooperation), however, the total net aggregate economic welfare is lower. From the perspective of

China, the incentives are quite different. China does not perform its best under the Nash equilibrium (2.75, 22.06), although the total economic welfare could be better under the cooperative situation for both parties. Particularly, China can gain more with weak governance in the LMB. This observation could explain why China is interested in signing bilateral agreements rather than multilateral ones, as shown in studies of Naohiro (2012) and Yongqi and Anfei (2013).

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