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The Illiquidity of Water Markets

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  • José-Antonio Espín-Sánchez
  • Javier Donna

Abstract

In 1966, the irrigation community in Mula (Murcia, Spain) switched from a market (auction), which had been in place in the town for over 700 years, to a system of fixed quotas with a ban on trading, to allocate water from the town's river. We present a model, in which farmers face liquidity constraints to explain why the change took place. We show that water demand will be underestimated if liquidity constraints are present. We use a dynamic demand model and data from the market period to estimate the parameters of the model. We estimate both the demand for water and the financial constraints of the farmers, thus obtaining unbiased estimates. In our model, markets achieve the first-best allocation only in the absence of liquidity constraints. In contrast, the quota achieves the first-best allocation only if farmers are homogeneous in productivity. We compute welfare under both institutions using the estimated parameters. We find that the quota is more efficient than the market. This result implies that one should be cautious in advocating for water markets, especially in developing areas where liquidity constraints might be a concern.

Suggested Citation

  • José-Antonio Espín-Sánchez & Javier Donna, 2014. "The Illiquidity of Water Markets," 2014 Papers pes132, Job Market Papers.
  • Handle: RePEc:jmp:jm2014:pes132
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    References listed on IDEAS

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    1. Aguirregabiria, Victor & Nevo, Aviv, 2010. "Recent developments in empirical IO: dynamic demand and dynamic games," MPRA Paper 27814, University Library of Munich, Germany.
    2. Rui Albuquerque & Hugo A. Hopenhayn, 2004. "Optimal Lending Contracts and Firm Dynamics," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 285-315.
    3. V. Joseph Hotz & Robert A. Miller & Seth Sanders & Jeffrey Smith, 1994. "A Simulation Estimator for Dynamic Models of Discrete Choice," Review of Economic Studies, Oxford University Press, vol. 61(2), pages 265-289.
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    5. Donna, Javier & Espin-Sanchez, Jose, 2014. "Complements and Substitutes in Sequential Auctions: The Case of Water Auctions," MPRA Paper 55079, University Library of Munich, Germany.
    6. Boizot, Christine & Robin, Jean-Marc & Visser, Michael, 2001. "The Demand for Food Products: An Analysis of Interpurchase Times and Purchased Quantities," Economic Journal, Royal Economic Society, vol. 111(470), pages 391-419, April.
    7. Christopher Udry, 1994. "Risk and Insurance in a Rural Credit Market: An Empirical Investigation in Northern Nigeria," Review of Economic Studies, Oxford University Press, vol. 61(3), pages 495-526.
    8. Seema Jayachandran, 2013. "Liquidity Constraints and Deforestation: The Limitations of Payments for Ecosystem Services," American Economic Review, American Economic Association, vol. 103(3), pages 309-313, May.
    9. Samuel Garrido, 2010. "Governing scarcity. Water markets, equity and efficiency in pre-1950s eastern Spain," Documentos de Trabajo de la Sociedad Española de Historia Agraria 1012, Sociedad Española de Historia Agraria.
    10. R. Quentin Grafton & Gary Libecap & Samuel McGlennon & Clay Landry & Bob O'Brien, 2011. "An Integrated Assessment of Water Markets: A Cross-Country Comparison," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 5(2), pages 219-239, Summer.
    11. Guinnane, Timothy W., 2001. "Cooperatives As Information Machines: German Rural Credit Cooperatives, 1883–1914," The Journal of Economic History, Cambridge University Press, vol. 61(2), pages 366-389, June.
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    Cited by:

    1. Donna, Javier & Espin-Sanchez, Jose, 2014. "Complements and Substitutes in Sequential Auctions: The Case of Water Auctions," MPRA Paper 55079, University Library of Munich, Germany.
    2. Donna, Javier D., 2018. "Measuring Long-Run Price Elasticities in Urban Travel Demand," MPRA Paper 90260, University Library of Munich, Germany.
    3. Börner, Lars & Quint, Daniel, 2010. "Medieval matching markets," Discussion Papers 2010/31, Free University Berlin, School of Business & Economics.

    More about this item

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water

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