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Do Security-Differentiated Water Rights Improve the Performance of Water Markets?

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  • Marianne Lefebvre
  • Lata Gangadharan
  • Sophie Thoyer

Abstract

Most existing water markets combine water rights trading and water allocation trading. Offering security-differentiated water rights can make the market more efficient and allow water users to manage the risks of supply uncertainty better. We conduct a laboratory experiment which compares two designs for water rights; one with a single security level and another with two security levels. We find that a two security level system increases overall profits when transactions costs are lower on the water rights market than on the water allocation market. It also improves risk allocation by allowing subjects to trade-off profits variability against expected profits according to their risk type and this result is robust to the existence of transactions costs on either market. Copyright 2012, Oxford University Press.

Suggested Citation

  • Marianne Lefebvre & Lata Gangadharan & Sophie Thoyer, 2012. "Do Security-Differentiated Water Rights Improve the Performance of Water Markets?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 94(5), pages 1113-1135.
    • Handle: RePEc:oup:ajagec:v:94:y:2012:i:5:p:1113-1135
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    File URL: http://hdl.handle.net/10.1093/ajae/aas060
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    Cited by:

    1. Liu, Duan & Yu, Nizhou & Wan, Hong, 2022. "Does water rights trading affect corporate investment? The role of resource allocation and risk mitigation channels," Economic Modelling, Elsevier, vol. 117(C).
    2. Bontems, Philippe & Nauges, Céline, 2017. "Production choices with water markets: The role of initial allocations and forward trading," TSE Working Papers 17-812, Toulouse School of Economics (TSE).
    3. Smith, Steven M., 2021. "The relative economic merits of alternative water right systems," Journal of Environmental Economics and Management, Elsevier, vol. 105(C).
    4. Speelman, Stijn & Veettil, Prakashan Chellattan, 2013. "Heterogeneous preferences for water rights reforms among smallholder irrigators in South Africa," Bio-based and Applied Economics Journal, Italian Association of Agricultural and Applied Economics (AIEAA), vol. 2(2), pages 1-19, August.
    5. Guerrero-Baena, M. Dolores & Villanueva, Anastasio J. & Gómez-Limón, José A. & Glenk, Klaus, 2019. "Willingness to pay for improved irrigation water supply reliability: An approach based on probability density functions," Agricultural Water Management, Elsevier, vol. 217(C), pages 11-22.
    6. Bigelow, Daniel P. & Zhang, Hongliang, 2018. "Supplemental irrigation water rights and climate change adaptation," Ecological Economics, Elsevier, vol. 154(C), pages 156-167.
    7. repec:ags:aaea22:335840 is not listed on IDEAS
    8. Benjamin Ouvrard & Stefan Ambec & Arnaud Reynaud & Stéphane Cezera & Murudaiah Shivamurthy, 2022. "Sharing rules for a common-pool resource in a lab experiment," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 59(3), pages 605-635, October.
    9. Philippe Bontems & Celine Nauges, 2018. "Production choices with water markets and risk aversion: the role of initial allocations and forward trading," Post-Print hal-02349932, HAL.
    10. Carlos Gutiérrez-Martín & José A. Gómez-Limón & Nazaret M. Montilla-López, 2022. "Priority Water Rights for Irrigation at the River Basin Level. Do They Improve Economic Efficiency During Drought Periods?," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 36(10), pages 3737-3758, August.
    11. Dietrich Earnhart & Nathan P. Hendricks, 2023. "Adapting to water restrictions: Intensive versus extensive adaptation over time differentiated by water right seniority," American Journal of Agricultural Economics, John Wiley & Sons, vol. 105(5), pages 1458-1490, October.
    12. Hassan, Wasim & Manzoor, Talha & Muhammad, Abubakr, 2023. "Improving equity in demand-driven irrigation systems through a rights-preserving water allocation mechanism," Agricultural Water Management, Elsevier, vol. 287(C).
    13. Gómez-Limón, José A. & Gutiérrez-Martín, Carlos & Montilla-López, Nazaret M., 2021. "Priority water rights. Are they useful for improving water-use efficiency at the irrigation district level?," Agricultural Water Management, Elsevier, vol. 257(C).

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