An Econometric Test of the Endogeneity of Institutions: Water Markets in the Western United States

In the western United States, the tremendous spatial and temporal variation in rainfall suggests that there are substantial gains from trade to be had through water markets. However, physical and institutional impediments to water transfers complicate the challenge of meeting the expanding population and environmental demands placed on water resources. Because of the variability in the relative importance of water supply uncertainty and trading impediments, markets are forming differently across the western United States. In many locations, trades take the form of short-term leases of water, where the underlying property rights remains unaffected. In other regions, transfers of permanent water rights predominate. Our econometric analysis of the determinants of 2247 transactions reported in the Water Strategist over 1993-2003 supports the conclusion that institutions have influenced not only whether water trades occur, but also whether trades are permanent water rights transfers or short-term leases.