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The Illiquidity of Water Markets

Author

Listed:
  • Jose-Antonio Espin-Sanchez

    (Northwestern University)

  • Javier Donna

    (The Ohio State University)

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

  • Jose-Antonio Espin-Sanchez & Javier Donna, 2014. "The Illiquidity of Water Markets," 2014 Meeting Papers 1247, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:1247
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    Citations

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    Cited by:

    1. Javier D. Donna & José†Antonio Espín†Sánchez, 2018. "Complements and substitutes in sequential auctions: the case of water auctions," RAND Journal of Economics, RAND Corporation, vol. 49(1), pages 87-127, March.
    2. Youming Liu & Shanjun Li & Caixia Shen, 2020. "The Dynamic Efficiency in Resource Allocation: Evidence from Vehicle License Lotteries in Beijing," NBER Working Papers 26904, National Bureau of Economic Research, Inc.
    3. Mari TANAKA & Yusuke NARITA & Chiaki MORIGUCHI, 2020. "Meritocracy and Its Discontent: Long-run Effects of Repeated School Admission Reforms," Discussion papers 20002, Research Institute of Economy, Trade and Industry (RIETI).
    4. Donna, Javier D., 2018. "Measuring Long-Run Price Elasticities in Urban Travel Demand," MPRA Paper 90059, University Library of Munich, Germany.
    5. Lars Boerner & Daniel Quint, 2023. "Medieval Matching Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(1), pages 23-56, February.
    6. Nicholas Ryan & Anant Sudarshan, 2020. "Rationing the Commons," Working Papers 2020-93, Becker Friedman Institute for Research In Economics.
    7. Nicholas Ryan & Anant Sudarshan, 2020. "Rationing the Commons," Cowles Foundation Discussion Papers 2239, Cowles Foundation for Research in Economics, Yale University.
    8. Nicholas Ryan & Anant Sudarshan, 2020. "Rationing the Commons," NBER Working Papers 27473, National Bureau of Economic Research, Inc.

    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
    • 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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