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The Value of Heterogeneous Property Rights: The Costs of Water Volatility

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  • Brent, Daniel A.
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    Abstract

    The system of prior appropriation in the Western Unites States prioritizes property rights for water based on the establishment of beneficial use, creating a hierarchy where rights initiated first are more secure. I estimate the demand for secure water rights through their capitalization in agricultural property markets using spatially explicit water rights data in the Yakima River Basin, a major watershed in Washington State. The Yakima River watershed, like many Western watersheds, satisfies all water claims during an average year so the benefits of secure water rights stem from protection against water curtailment during drought years. Thus the relative value of secure property rights is a function of water supply volatility because the costs of droughts are predominantly born by those with weak rights. In a hedonic price model I find that farmers pay a premium of 9-12% for more secure water rights. I use Bayesian model averaging to deal with model uncertainty and the potential omitted variable bias prevalent in hedonic analysis. An endogenous change point model tests whether the premium on a senior right varies over time, potentially in response to expectations about climate change. The results fail to confirm that farmers’ expectations about future water supply volatility are manifested in agricultural water markets.

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    Bibliographic Info

    Paper provided by Agricultural and Applied Economics Association in its series 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. with number 149698.

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    Date of creation: May 2013
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    Handle: RePEc:ags:aaea13:149698

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    Keywords: Research Methods/ Statistical Methods; Resource /Energy Economics and Policy;

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    1. Oscar R. Burt, 1964. "Optimal Resource Use Over Time with an Application to Ground Water," Management Science, INFORMS, vol. 11(1), pages 80-93, September.
    2. Markus Goldstein & Christopher Udry, 2008. "The Profits of Power: Land Rights and Agricultural Investment in Ghana," Journal of Political Economy, University of Chicago Press, vol. 116(6), pages 981-1022, December.
    3. Sheila M. Olmstead, 2010. "The Economics of Managing Scarce Water Resources," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 4(2), pages 179-198, Summer.
    4. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
    5. Raymond B. Palmquist, 1989. "Land as a Differentiated Factor of Production: A Hedonic Model and Its Implications for Welfare Measurement," Land Economics, University of Wisconsin Press, vol. 65(1), pages 23-28.
    6. Ragan A. Petrie & Laura O. Taylor, 2007. "Estimating the Value of Water Use Permits: A Hedonic Approach Applied to Farmland in the Southeastern United States," Land Economics, University of Wisconsin Press, vol. 83(3), pages 302-318.
    7. Wolfram Schlenker & W. Michael Hanemann & Anthony C. Fisher, 2005. "Will U.S. Agriculture Really Benefit from Global Warming? Accounting for Irrigation in the Hedonic Approach," American Economic Review, American Economic Association, vol. 95(1), pages 395-406, March.
    8. Diao, Xinshen & Dinar, Ariel & Roe, Terry L. & Tsur, Yacov, 2007. "A General Equilibrium Analysis Of Conjunctive Ground And Surface Water Use With An Application To Morocco," Discussion Papers 7143, Hebrew University of Jerusalem, Department of Agricultural Economics and Management.
    9. Palmquist, Raymond B., 1988. "Welfare measurement for environmental improvements using the hedonic model: The case of nonparametric marginal prices," Journal of Environmental Economics and Management, Elsevier, vol. 15(3), pages 297-312, September.
    10. Tsur, Yacov & Graham-Tomasi, Theodore, 1991. "The buffer value of groundwater with stochastic surface water supplies," Journal of Environmental Economics and Management, Elsevier, vol. 21(3), pages 201-224, November.
    11. Halvorsen, Robert & Palmquist, Raymond, 1980. "The Interpretation of Dummy Variables in Semilogarithmic Equations," American Economic Review, American Economic Association, vol. 70(3), pages 474-75, June.
    12. repec:reg:rpubli:291 is not listed on IDEAS
    13. John Faux & Gregory M. Perry, 1999. "Estimating Irrigation Water Value Using Hedonic Price Analysis: A Case Study in Malheur County, Oregon," Land Economics, University of Wisconsin Press, vol. 75(3), pages 440-452.
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