Potential for groundwater management: Gisser-Sanchez effect reconsidered

This paper revisits Gisser-Sanchez's effect, a paradoxical empirical result that persists in the groundwater literature since 1980, when it was first identified by Gisser and Sanchez. In essence, Gisser-Sanchez's effect (GSE) states that the numerical magnitude of benefits of optimally managing groundwater is insignificant. This paper critically reviews both the theoretical and empirical attempts to address GSE. It highlights the fact that in the theoretical literature the single most important cause for the presence of GSE is the prevalence of very steep marginal groundwater use benefit curves, which imply that groundwater usage is not very sensitive to price changes. However there exist circumstances that its effects can be eliminated. Thus the case for different theoretical investigations is put forward. Moreover, this paper also points at various misconceptions, inaccuracies, and omissions of the current state of the literature that could potentially resolve part of the existing puzzle.