An empirical analysis of demand for water rights transfers and leases in western water markets: a simultaneous approach

Water demand continues to increase in the western U.S., straining existing (and forecasted future) supplies. Water transfers – through either the sale of water rights or contractual leases of bounded duration – are now a well-established means of reallocating water to the highest economic benefit. Water is not a typical commodity, however. Significant variability in price across different geographic locations reflects differences in hydrologic conditions, demand and supply, and infrastructure development. These differences will persist even in well-functioning markets due to high transportation costs and user interconnectivity. While sufficient data now exist to describe market activity and price trends, no study has yet performed a rigorous analysis that fully accounts for contract type (whether water rights transfer or lease) and price endogeneity. We fill this gap by estimating a simultaneous system of demand equations for rights transfers and leases that accounts for supply drivers of price determination. As one might anticipate, the demand for leases is more elastic than the demand for water rights. Accounting for contract type and price endogeneity provides a more accurate estimation of water’s market value in different locations across the western U.S. Ignoring either issue leads to significant biases with policy implications.