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The Illiquidity of Water Markets

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  • Donna, Javier
  • Espin-Sanchez, Jose

Abstract

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.

Suggested Citation

  • Donna, Javier & Espin-Sanchez, Jose, 2014. "The Illiquidity of Water Markets," MPRA Paper 55078, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:55078
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    References listed on IDEAS

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    1. 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.
    2. 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.
    3. Victor Aguirregabiria & Victor Aguirregabiria & Aviv Nevo & Aviv Nevo, 2010. "Recent Developments in Empirical IO: Dynamic Demand and Dynamic Games," Working Papers tecipa-419, University of Toronto, Department of Economics.
    4. V. Joseph Hotz & Robert A. Miller, 1993. "Conditional Choice Probabilities and the Estimation of Dynamic Models," Review of Economic Studies, Oxford University Press, vol. 60(3), pages 497-529.
    5. 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.
    6. 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.
    7. 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.
    8. 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.
    9. 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.
    10. Guinnane, Timothy W., 2001. "Cooperatives As Information Machines: German Rural Credit Cooperatives, 1883 1914," The Journal of Economic History, Cambridge University Press, vol. 61(02), pages 366-389, June.
    11. 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.
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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. Börner, Lars & Quint, Daniel, 2010. "Medieval matching markets," Discussion Papers 2010/31, Free University Berlin, School of Business & Economics.

    More about this item

    Keywords

    Organization of Production; Institutions; Financial Markets; Market Efficiency; Water;

    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
    • 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

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