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The Design of ``Smart'' Water Market Institutions Using Laboratory Experiments

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  • James Murphy
  • Ariel Dinar
  • Richard Howitt
  • Steven Rassenti
  • Vernon Smith

Abstract

One of the problems with proposals for substantialinstitutional change in water systems is thatmodification and irreversibility make the processslow, cautious and costly to society. In this paper,we discuss the role that experimental economics canplay in evaluating proposed institutional changes tohelp facilitate a more rapid and smooth adoption ofchanges in the water system. Experimental economicsyields a formal and replicable system for analyzingalternative market structures before they are actuallyimplemented. For example, a water market can bedeveloped and tested in the laboratory under supplyand demand constraints that reflect drought conditionsthat might occur in California, or other arid regionsin the world. We present a prototype of a Californiawater transfer model and the results from a series ofwater market experiments. Results include realizedmarket efficiency and surplus distribution, as well asan analysis of market price volatility. Theimplications of this research extend well beyondCalifornia water markets, not only to water markets inother arid regions, but also to the design of marketsfor other environmental goods, including tradablepollution permits and fishery ITQs. Copyright Kluwer Academic Publishers 2000

Suggested Citation

  • James Murphy & Ariel Dinar & Richard Howitt & Steven Rassenti & Vernon Smith, 2000. "The Design of ``Smart'' Water Market Institutions Using Laboratory Experiments," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 17(4), pages 375-394, December.
    • Handle: RePEc:kap:enreec:v:17:y:2000:i:4:p:375-394
    DOI: 10.1023/A:1026598014870
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    References listed on IDEAS

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    1. Smith, Vernon L, 1982. "Microeconomic Systems as an Experimental Science," American Economic Review, American Economic Association, vol. 72(5), pages 923-955, December.
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    3. Rassenti, Stephen J & Reynolds, Stanley S & Smith, Vernon L, 1994. "Cotenancy and Competition in an Experimental Auction Market for Natural Gas Pipeline Networks," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(1), pages 41-65, January.
    4. Vernon L. Smith, 1980. "Relevance of Laboratory Experiments to Testing Resource Allocation Theory," NBER Chapters, in: Evaluation of Econometric Models, pages 345-377, National Bureau of Economic Research, Inc.
    5. McCabe, Kevin A. & Rassenti, Stephen J. & Smith, Vernon L., 1989. "Designing `smart' computer-assisted markets : An experimental auction for gas networks," European Journal of Political Economy, Elsevier, vol. 5(2-3), pages 259-283.
    6. Jan Kmenta & James B. Ramsey, 1980. "Evaluation of Econometric Models," NBER Books, National Bureau of Economic Research, Inc, number kmen80-1.
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    Cited by:

    1. Ghosh, Sanchari & Cobourn, Kelly & Elbakidze, Levan, 2013. "Water Banks, Markets, and Prior Appropriation: A Comparison of Water Allocation Instruments in the Eastern Snake River Plain," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150643, Agricultural and Applied Economics Association.
    2. Hans‐Theo Normann & Roberto Ricciuti, 2009. "Laboratory Experiments For Economic Policy Making," Journal of Economic Surveys, Wiley Blackwell, vol. 23(3), pages 407-432, July.
    3. Murphy, James J. & Dinar, Ariel & Howitt, Richard E. & Rassenti, Stephen J. & Smith, Vernon L. & Weinberg, Marca, 2004. "Incorporating Instream Flow Values Into A Water Market," Working Paper Series 14525, University of Massachusetts, Amherst, Department of Resource Economics.
    4. Janie M. Chermak & Kate Krause & David S. Brookshire & H. Stu Burness, 2013. "Moving Forward By Looking Back: Comparing Laboratory Results With Ex Ante Market Data," Economic Inquiry, Western Economic Association International, vol. 51(1), pages 1035-1049, January.
    5. Raffensperger, John F., 2011. "Matching users' rights to available groundwater," Ecological Economics, Elsevier, vol. 70(6), pages 1041-1050, April.
    6. Debaere, Peter & Li, Tianshu, 2017. "The Effects of Water Markets: Evidence from the Rio Grande," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 259187, Agricultural and Applied Economics Association.
    7. John F. Raffensperger & Mark W. Milke & E. Grant Read, 2009. "A Deterministic Smart Market Model for Groundwater," Operations Research, INFORMS, vol. 57(6), pages 1333-1346, December.
    8. Calatrava-Leyva, Javier & Colmenero, Alberto Garrido, 2001. "Analisis del efecto de los mercados de agua sobre el beneficio de las explotaciones, la contaminacion por nitratos y el empleo eventual agrario," Economia Agraria y Recursos Naturales, Spanish Association of Agricultural Economists, vol. 1(02), pages 1-21, December.
    9. Tisdell, John, 2011. "Water markets in Australia: an experimental analysis of alternative market mechanisms," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 55(4), pages 1-18.
    10. Alberto Garrido, 2007. "Designing Water Markets for Unstable Climatic Conditions: Learning from Experimental Economics," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 29(3), pages 520-530.
    11. Shyama Ratnasiri & Clevo Wilson & Wasantha Athukorala & Maria A. Garcia-Valiñas & Benno Torgler & Robert Gifford, 2018. "Effectiveness of two pricing structures on urban water use and conservation: a quasi-experimental investigation," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 20(3), pages 547-560, July.
    12. Alberto Garrido, 2007. "Water markets design and evidence from experimental economics," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 38(3), pages 311-330, November.
    13. Craig D. Broadbent & David S. Brookshire & Don Coursey & Vince Tidwell, 2017. "Futures Contracts in Water Leasing: An Experimental Analysis Using Basin Characteristics of the Rio Grande, NM," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 68(3), pages 569-594, November.
    14. Noussair, C.N. & van Soest, D.P., 2014. "Economic Experiments and Environmental Policy : A Review," Discussion Paper 2014-001, Tilburg University, Center for Economic Research.
    15. James J. Murphy & Ariel Dinar & Richard E. Howitt & Erin Mastrangelo & Stephen J. Rassenti & Vernon L. Smith, 2006. "Mechanisms for Addressing Third-Party Impacts Resulting From Voluntary Water Transfers," Chapters, in: John A. List (ed.), Using Experimental Methods in Environmental and Resource Economics, chapter 5, Edward Elgar Publishing.
    16. Aurora García-Gallego & Nikolaos Georgantzís & Roberto Hernán-González & Praveen Kujal, 2012. "How do Markets Manage Water Resources? An Experiment," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 53(1), pages 1-23, September.
    17. Kristiana Hansen & Jonathan Kaplan & Stephan Kroll, 2014. "Valuing Options in Water Markets: A Laboratory Investigation," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 57(1), pages 59-80, January.
    18. Tellez Foster, Edgar & Rapoport, Amnon & Dinar, Ariel, 2017. "Groundwater and electricity consumption under alternative subsidies: Evidence from laboratory experiments," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 68(C), pages 41-52.
    19. John Raffensperger & Thomas Cochrane, 2010. "A Smart Market for Impervious Cover," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 24(12), pages 3065-3083, September.
    20. Juchems, Elizabeth M. & Schoengold, Karina & Brozovic, Nicholas, 2013. "Predicting Groundwater Trading Participation In The Upper Republican Natural Resource District," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150511, Agricultural and Applied Economics Association.
    21. D. Lumbroso & C. Twigger-Ross & J. Raffensperger & J. Harou & M. Silcock & A. Thompson, 2014. "Stakeholders’ Responses to the Use of Innovative Water Trading Systems in East Anglia, England," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 28(9), pages 2677-2694, July.
    22. Suresh P. Sethi & Sushil Gupta & Vipin K. Agrawal & Vijay K. Agrawal, 2022. "Nobel laureates’ contributions to and impacts on operations management," Production and Operations Management, Production and Operations Management Society, vol. 31(12), pages 4283-4303, December.

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