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The Illiquidity of Water Markets

  • Donna, Javier
  • Espin-Sanchez, Jose

We 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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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 55078.

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Date of creation: Feb 2014
Date of revision:
Handle: RePEc:pra:mprapa:55078
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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. repec:inr:wpaper:249990 is not listed on IDEAS
  3. repec:oup:restud:v:60:y:1993:i:3:p:497-529 is not listed on IDEAS
  4. 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.
  5. 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.
  6. Seema Jayachandran, 2013. "Liquidity Constraints and Deforestation: The Limitations of Payments for Ecosystem Services," American Economic Review, American Economic Association, vol. 103(3), pages 309-13, May.
  7. repec:oup:restud:v:61:y:1994:i:3:p:495-526 is not listed on IDEAS
  8. 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.
  9. Timothy W. Guinnane, 1997. "Cooperatives as Information Machines: German Rural Credit Cooperatives, 1883-1914," Discussion Papers 97-20, University of Copenhagen. Department of Economics.
  10. 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.
  11. repec:oup:restud:v:61:y:1994:i:2:p:265-89 is not listed on IDEAS
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