Do Security-differentiated Water Rights Improve Efficiency?

Abstract

Most existing water markets combine water rights trading and water allocation trading. Offering different levels of security for rights can make the market more sophisticated and allow water users to manage the risks of supply uncertainty better. We compare results from a laboratory experiment with two water right designs, one with a unique security level and another with two security levels. We find that a two security levels system improves both allocative eciency and risk management, but only when transactions costs are higher in the market for water allocation than in the market for water rights.Crude Oil Pricing, Currency Basket, OPEC, Exchange Rate of Dollar, Euros, Yen.