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The Illiquidity of Water Markets

José-Antonio Espín-Sánchez () and Javier Donna

No 1247, 2014 Meeting Papers from Society for Economic Dynamics

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.

Date: 2014
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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) Downloads
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More papers in 2014 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
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