In this paper we have attempted to analyze the effects of inter-linkage of the Ganges and Brahmaputra River basin on future water allocation between India and Bangladesh. From a social planner’s perspective, we determined the optimal diversions of water from Brahmaputra. We also examined the endogeniety of risk of environmental losses in Bangladesh if India diverts a share of water above the threshold level from Brahmaputra River. Bangladesh can use selfprotection as a means of resistance to environmental damage, while India can supply more water to downstream Brahmaputra River as a control measure to environmental damage. The social planner’s objective will be to minimize social cost with respect to the environmental damage resistance and environmental damage control.