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The Illiquidity of Water Markets

Javier Donna and Jose Espin-Sanchez

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Organization of Production; Institutions; Financial Markets; Market Efficiency; Water (search for similar items in EconPapers)
JEL-codes: D02 D53 G14 L23 Q25 (search for similar items in EconPapers)
Date: 2014-02
New Economics Papers: this item is included in nep-agr, nep-dcm and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3) Track citations by RSS feed

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/55078/1/MPRA_paper_55078.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/66998/8/MPRA_paper_66998.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/77154/1/MPRA_paper_77154.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/91594/1/MPRA_paper_91594.pdf revised version (application/pdf)

Related works:
Working Paper: The Illiquidity of Water Markets (2021) Downloads
Working Paper: The Illiquidity of Water Markets (2014) Downloads
Working Paper: The Illiquidity of Water Markets (2014)
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