Abstract
We study a situation where precipitations are relatively abundant in one river basin while the productivity of water is relatively high in a neighboring river basin. Moreover we consider that the economic benefits linked with the transfer of water from the former to the latter overcome the construction costs of the required infrastructure. In this case, the two regions might have an incentive to cooperate and construct a canal. This problem is analyzed distinguishing two periods. A side-payment is defined to guarantee overall individual rationality: each region is globally better off by agreeing to cooperate first and convey/receive water later on than in the no transfer scenario. Further, the side-payment must guarantee time consistency: individual rationality in every subgame along the cooperative trajectory.