This study illustrates how integrated river basin management can conflict with our increased emphasis on decentralizing water resources decision making. For over a decade, water and environmental decision making in many countries has been shifting from national levels to state/province and local levels. At the same time we have increasingly found that it is critical to consider how individual water resource decisions impact the river basin. We provide detailed examples of this incompatibility dilemma from the United States and Turkey as well as smaller examples from Japan and Macedonia. We argue that new institutional models are required for effective river basin management and that implementation of such models can be evaluated through the use of transaction costs. This study concludes with examples of institutional arrangements that can help bridge the incompatibility gap.