Valuing Options in Water Markets: A Laboratory Investigation

Kristiana Hansen (), Jonathan Kaplan () and Stephan Kroll ()

Environmental & Resource Economics, 2014, vol. 57, issue 1, 59-80

Abstract: Risk and reliability dominate water supply discussions in the arid western United States due to increasing demand and finite, weather-dependent supply. Water markets have evolved in this region so agencies could meet this growing demand. In a few instances, water agencies turned to contractual mechanisms such as options to manage supply. As demand continues to grow option markets and other novel approaches to allocating water may become increasingly popular. We utilize experimental economics to analyze the effect of annual options on water markets in the absence of sufficient real-world data for conventional econometric analysis. We find gains from trade are higher when options can be traded. Additionally, gains are more evenly distributed, particularly with a dominant buyer and many sellers. Findings suggest option markets may be a viable choice as policymakers prepare for future droughts. Copyright Springer Science+Business Media Dordrecht 2014

Keywords: Dry-year options; Experimental economics; Market design; Water markets; Water resource allocation; D23; L22; Q25 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (4)

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Working Paper: Valuing Options in Water Markets: A Laboratory Investigation (2008)
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DOI: 10.1007/s10640-013-9659-6

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