This paper examines the consequences of decentralization in the management of canal irrigation for spatial allocation of water and agricultural performance. Under centralized management, farmers closer to the canal tend to over-extract water, resulting in spatial misallocation. We test whether decentralization can improve spatial allocation of water by exploiting the differential timing of the constitution of locally elected canal management bodies (“Pani Panchayats”) in the state of Orissa, India, that decentralized its canal management. Using survey data and a heterogeneous treatment effect estimation strategy using farmer level fixed effects, we show that farming plots farther away from the canal received less water under centralized system, but longer exposure to decentralization significantly reduces spatial misallocation. Consequently, agricultural revenue and wealth (landholding) improve more for those farmers. The effect of decentralization is more pronounced in areas with high land inequality and lower in areas where plots are similarly sized across distance from canal. We find suggestive evidence that distant farmers’ ability to complain to local representatives is an important mechanism explaining our results.