This is the first study that records the quantum of transaction costs in Nepal’s Farmer Managed Irrigation Systems (FMIS) and analyzes the factors influencing them. The paper further examines the impact of transaction costs on irrigation management and agricultural productivity in Nepal. A field survey in the Kathmandu valley, reveals that the main constituent of transaction costs is time spent on waiting, watching and negotiating (WWN) which amount to 90% of the ex-post transaction costs and 81% of the total transaction costs. The share of transaction time as a percentage of the total human labor required for the production of crops was 5% and transaction costs amount to 1.7% of the total value of output. It is rational for farmers to invest in ensuring irrigation because farmers with reliable irrigation report higher productivity. We find transaction costs are higher for households cultivating downstream of a canal than those cultivating upstream. Transaction costs are three times higher for winter crops more than for summer crops when the area receives monsoon rains. While transaction costs and productivity are weakly inversely related for households in all registered irrigation systems, in small systems unregistered WUAs transaction costs and productivity are positively correlated.
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