Groundwater and Crop Choice in the Short and Long Run

Fiona Burlig, Louis Preonas () and Matt Woerman

No 28706, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: How do agents respond to policy when investments have high upfront costs and lasting payoffs? We estimate farmers’ short- and long-run responses to changes in groundwater pumping costs in California, one of the world’s most valuable agricultural regions, where perennial crops with these investment dynamics are prevalent. We leverage quasi-experimental variation in groundwater costs driven by regulated electricity tariffs to estimate a dynamic discrete choice model of land use with state dependence and forward-looking farmers. Farmers’ short-run elasticity of groundwater demand is −0.72, but temporary cost shocks do not induce crop switching. In contrast, their long-run elasticity is −0.48, driven by a shift away from unsustainable short-run coping strategies and towards meaningful reductions in water-intensive perennial cropping and increased fallowing. California’s flagship groundwater sustainability targets will require a 47% tax in regulated areas on average, which would lower perennial acreage by 10% and increase fallowing by 18%.

JEL-codes: Q15 Q25 Q41 (search for similar items in EconPapers)
Date: 2021-04
New Economics Papers: this item is included in nep-agr, nep-dcm and nep-ene
Note: EEE
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Citations: View citations in EconPapers (4)

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