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Empirical Application of Rubinstein Bargaining Model in Western U.S. Water Transactions

Author

Listed:
  • Rowan Isaaks

    (Vanderbilt University, Nashville, TN 37235, USA)

  • Bonnie Colby

    (University of Arizona, Tucson, AZ 85721, USA)

Abstract

Water transactions are proposed as a policy tool for increasing regional drought resilience and improving allocative efficiency. However, water trading deviates considerably from classical competitive markets and alternative theoretical approaches are useful for understanding water market structure and performance. In this paper, we model a bilateral water transaction using a non-cooperative bargaining model. Then we empirically test predictions regarding time preference, outside options, and water supply risk. The econometric analysis encompasses two transaction regions: Colorado’s Front Range and New Mexico’s Middle Rio Grande Basin. We find evidence suggesting that larger cities pay lower prices in water transactions, faster growing and higher income cities pay higher prices and that prices are higher when snowpack variability is higher. Findings suggest that a stronger time preference results in a less favorable price for urban buyers and that buyer risk-aversion is a greater disadvantage in bargaining in locations with greater water supply variability.

Suggested Citation

  • Rowan Isaaks & Bonnie Colby, 2020. "Empirical Application of Rubinstein Bargaining Model in Western U.S. Water Transactions," Water Economics and Policy (WEP), World Scientific Publishing Co. Pte. Ltd., vol. 6(01), pages 1-25, January.
  • Handle: RePEc:wsi:wepxxx:v:06:y:2020:i:01:n:s2382624x19500103
    DOI: 10.1142/S2382624X19500103
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    Cited by:

    1. Françeska Tomori & Erik Ansink & Harold Houba & Nick Hagerty & Charles Bos, 2024. "Market power in California's water market," American Journal of Agricultural Economics, John Wiley & Sons, vol. 106(3), pages 1274-1299, May.
    2. Tomori, Françeska & Ansink, Erik & Houba, Harold & Hagerty, Nick & Bos, Charles, 2021. "Market power in California’s water market," Working Papers 2072/534854, Universitat Rovira i Virgili, Department of Economics.

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