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The Gravity of Water: Water Trade Frictions in California

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  • Charles Regnacq
  • Ariel Dinar
  • Ellen Hanak

Abstract

It is relatively well accepted that costs associated with transfers weigh upon water markets and deter some exchanges. But few studies explicitly address such costs and their impacts on trading behavior. In this article we fill this gap, using a tool from the international trade literature called the gravity equation. We first develop a theoretical model to assess the micro-foundation of this approach in a water market context. The model distinguishes between variable and fixed costs of trade, which allows us to disentangle the decision to enter into the water market (extensive margin) and the decision on the quantity of water to be transferred (intensive margin). We then test the theoretical predictions using water transfer data among California water districts over a 17-year period. We approximate transfer costs by distance and institutional factors. Results validate the theoretical predictions and show the importance of distance and institutional impediments in the decision to trade.

Suggested Citation

  • Charles Regnacq & Ariel Dinar & Ellen Hanak, 2016. "The Gravity of Water: Water Trade Frictions in California," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 98(5), pages 1273-1294.
  • Handle: RePEc:oup:ajagec:v:98:y:2016:i:5:p:1273-1294.
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    File URL: http://hdl.handle.net/10.1093/ajae/aaw051
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    Cited by:

    1. Li, Zhi & Zhang, Xin & Xu, Wenchao, 2018. "Water Transactions along a River: A Multilateral Bargaining Experiment with a Veto Player," 2018 Annual Meeting, August 5-7, Washington, D.C. 274048, Agricultural and Applied Economics Association.
    2. Bruno, Ellen & Jessoe, Katrina K., 2018. "Groundwater, Incomplete Regulation, and Climate Change: Micro-level Evidence on the Price Elasticity of Demand for Agricultural Groundwater," 2018 Annual Meeting, August 5-7, Washington, D.C. 274430, Agricultural and Applied Economics Association.
    3. Bruno, Ellen M. & Jessoe, Katrina, 2021. "Missing markets: Evidence on agricultural groundwater demand from volumetric pricing," Journal of Public Economics, Elsevier, vol. 196(C).
    4. Billy A. Ferguson & Paul Milgrom, 2024. "Market Design for Surface Water," NBER Chapters, in: New Directions in Market Design, National Bureau of Economic Research, Inc.
    5. Ifft, Jennifer & Bigelow, Daniel P. & Savage, Jeffrey, 2018. "The Impact of Irrigation Restrictions on Cropland Values in Nebraska," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 43(2), May.
    6. Françeska Tomori & Erik Ansink & Harold Houba & Nick Hagerty & Charles Bos, 2021. "Market power in California's water market," Tinbergen Institute Discussion Papers 21-011/VIII, Tinbergen Institute.
    7. Juliane Haensch & Sarah Ann Wheeler & Alec Zuo, 2021. "Explaining permanent and temporary water market trade patterns within local areas in the southern Murray–Darling Basin," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 65(2), pages 318-348, April.
    8. Rowan Isaaks & Bonnie Colby, 2019. "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, September.
    9. Jeong, Dawoon & Sesmero, Juan Pablo & Reeling, Carson, 2023. "Experimental Evidence of Efficiency and Equity of Posted Price Markets for Irrigation Water," 2023 Annual Meeting, July 23-25, Washington D.C. 335840, Agricultural and Applied Economics Association.
    10. 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.
    11. Delbourg, Esther & Dinar, Shlomi, 2020. "The globalization of virtual water flows: Explaining trade patterns of a scarce resource," World Development, Elsevier, vol. 131(C).

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