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Do Security-Differentiated Water Rights Improve the Performance of Water Markets?

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  • Marianne Lefebvre
  • Lata Gangadharan
  • Sophie Thoyer

Abstract

Most existing water markets combine water rights trading and water allocation trading. Offering security-differentiated water rights can make the market more efficient and allow water users to manage the risks of supply uncertainty better. We conduct a laboratory experiment which compares two designs for water rights; one with a single security level and another with two security levels. We find that a two security level system increases overall profits when transactions costs are lower on the water rights market than on the water allocation market. It also improves risk allocation by allowing subjects to trade-off profits variability against expected profits according to their risk type and this result is robust to the existence of transactions costs on either market. Copyright 2012, Oxford University Press.

Suggested Citation

  • Marianne Lefebvre & Lata Gangadharan & Sophie Thoyer, 2012. "Do Security-Differentiated Water Rights Improve the Performance of Water Markets?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 94(5), pages 1113-1135.
  • Handle: RePEc:oup:ajagec:v:94:y:2012:i:5:p:1113-1135
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    File URL: http://hdl.handle.net/10.1093/ajae/aas060
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    Cited by:

    1. Bontems, Philippe & Nauges, CĂ©line, 2017. "Production choices with water markets: The role of initial allocations and forward trading," TSE Working Papers 17-812, Toulouse School of Economics (TSE).
    2. Speelman, Stijn & Veettil, Prakashan Chellattan, 2013. "Heterogeneous preferences for water rights reforms among smallholder irrigators in South Africa," Bio-based and Applied Economics Journal, Italian Association of Agricultural and Applied Economics (AIEAA), issue 2, August.

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