The Illiquidity of Water Markets
AbstractWe explore a particular historical episode that switched from a market institution (auctions) to a non-market institution (fixed quotas with a ban on trading) to allocate water. This water is used by farmers for agricultural purposes; some of the farmers are liquidity constraints. We present a model in which farmers face liquidity constraints to explain why the change took place. From a positive perspective, we show that demand is underestimated if these liquidity constraints are not taken into account. We use a dynamic discrete choice model to estimate demand during the auction period; we also estimate the probability of being liquidity constrained by a farmer. From a normative perspective, auctions achieve the first-best allocation only in the absence of liquidity constraints; the quota achieves the first best allocation only if farmers are homogeneous in productivity. We compute the welfare under both institutions using the estimated parameters of the structural model.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 55078.
Date of creation: Feb 2014
Date of revision:
Organization of Production; Institutions; Financial Markets; Market Efficiency; Water;
Find related papers by JEL classification:
- D02 - Microeconomics - - General - - - Institutions: Design, Formation, and Operations
- D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
- Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water
This paper has been announced in the following NEP Reports:
- NEP-AGR-2014-04-18 (Agricultural Economics)
- NEP-ALL-2014-04-18 (All new papers)
- NEP-DCM-2014-04-18 (Discrete Choice Models)
- NEP-REG-2014-04-18 (Regulation)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Victor Aguirregabiria & Pedro mira, 2007.
"Dynamic Discrete Choice Structural Models: A Survey,"
tecipa-297, University of Toronto, Department of Economics.
- Aguirregabiria, Victor & Mira, Pedro, 2010. "Dynamic discrete choice structural models: A survey," Journal of Econometrics, Elsevier, vol. 156(1), pages 38-67, May.
- Pedro Mira & Victor Aguirregabiria, 2007. "Dynamic Discrete Choice Structural Models: A Survey," Working Papers wp2007_0711, CEMFI.
- Victor Aguirregabiria & Pedro Mira, 1999.
"Swapping the Nested Fixed-Point Algorithm: a Class of Estimators for Discrete Markov Decision Models,"
Computing in Economics and Finance 1999
332, Society for Computational Economics.
- Victor Aguirregabiria & Pedro Mira, 2002. "Swapping the Nested Fixed Point Algorithm: A Class of Estimators for Discrete Markov Decision Models," Econometrica, Econometric Society, vol. 70(4), pages 1519-1543, July.
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