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We assume now that by exerting an effort which costs him ip the agent increases the probability of a ^-discovery from UQ to i/i > i/Q and let Au = ui — UQ. Because intuitively the principal wishes to discourage the agent from making an effort, let us first solve our program under the constraint that the agent exerts no effort: max iyo{u{q) - t) + (1 - iyo){u{q) - t) under (1)(2)(4)(5) and VQ{u{e -q)+t) + {l-Uo){u{e > ui{u{0 -q) + t) + {lThis last constraint can be rewritten as -q)+t) iyi){u{9 -q)+t)-ij.

In general, communities specialize some individuals (hunters, fishermen) to look for these resources. Hence most of the R&D efforts are delegated by principals to agents through labor contracts. The R&D literature has well taken into account the randomness of discoveries and the need to structure contracts for giving proper incentives to the agents in charge of R&D tasks. One essential feature of the discovery process which has not been taken into account is that, almost by definition, the nature or size of the discovery is private information of the agent who makes the *This paper was prepared for the talks given at the University of Cahfomia at Berkeley and Davis and sponsored by the Giannini Foundation and for the book Frontiers in Water Resource Economics.

That is, she would take decisions taking into account a conditional probability 48 Calatrava Leyva and Garrido distribution of water allotment with a minor range than the absolute probability distribution of allotment. As commented above, it can be assumed that variability of allotment is transformed in the variability of the opportunity cost of water (Howitt and Taylor, 1993; Howitt, 1998). In a competitive water market, the cost of using water for production is given by its market price (purchase cost for the buyer and opportunity cost for the seller).

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