water market, experiments, resource economies, Marketing, Resource /Energy Economics and Policy,

Cook, Joseph H.

Rabotyagov, Sergey S.

English

Research Papers in Economics

www.postersession.com
Methods
Conclusions
Unlocking water markets: an experimental approach
Joseph Cooka and Sergey Rabotyagovb
UNIVERSITY OF WASHINGTON, a EVANS SCHOOL OF PUBLIC AFFAIRS, b SCHOOL OF FOREST RESOURCES
Figure 2.  Sample experimental choice
Bibliography
We recruited 49 irrigators with 
senior water rights in the upper 
Yakima River Basin in 
Washington state to participate 
in a series of experimental 
auctions.  These auctions asked 
participants to imagine that they 
owned and operated a 100-acre 
timothy hay farm with a given 
level of net revenue (i.e. an 
induced value design).  
Participants then reacted to 
series of offers for 1-year leases 
from hypothetical buyers where
Brewer, J., R. Glennon, et al. (2008). "Water markets in the West: Prices, trading, and 
contractual forms." Economic Inquiry 91-112.
Donohew, Z. (2009). "Property rights and western United States water markets." 
Australian Journal of Agricultural and Resource Economics 53: 85-103.
Young, R. A. (1986). "Why are there so few transactions among water users?" American 
Journal of Agricultural Economics December: 1143-1151.
Using a sample of potential water market participants, we 
find that several non-price attributes of a water market 
contract matter, and that the irrigators demand a different 
premium, depending on the water contract offered. 
Agriculture-to-agriculture water transfers occurring in the  
later part of the growing  season appear to have the highest 
potential for success. These results could be embedded in an 
hydroeconomic model of possible water market activity for 
the Basin.
Introduction Results
Acknowledgments
Objectives
.
The research was funded by the Environmental Institute at the University of Washington’s College of the Environment. We would
like to thank Mary Ann Rozance, Lily Hsueh, Sean Trimble and Kyle Schoenfeld for excellent research assistance, as well as Steve 
Fransen, Bob Barwin, Steve Malloch, Michael Garrity, Jason McCormick, Rick Dieker, Jim Trull, Ron Van Gundy, Anna Lael, Ann 
Root, Tom Ring, Dale Bambrick, Derek Sandison, and Wendy Christensen for helpful discussions. All opinions and any remaining 
errors, however, are ours alone. 
Water markets - the lease and sale of water rights 
between willing buyers and willing sellers - have long 
interested economists.  They have the potential to 
increase the efficiency of water use by moving water 
from lower-valued to higher-valued uses and increasing 
the incentive for irrigation efficiency. Despite the 
enthusiasm of economists, water markets have largely 
generally failed to develop in the western U.S., and 
indeed in most of the world (Young 1986, Brewer et al. 
2008, Donohew 2009). 
There are a number of possible explanations, including 
legal uncertainty surrounding water rights and fear of 
discovery, high transaction costs, potential third-party 
effects, and opposition from irrigation districts. We 
explore one potential reason that we feel has received 
less attention in the economics and policy literature:  
farmers as sellers may have preferences for different 
elements of a water market transaction that are not 
captured in the relative comparison of their profits from 
farming and their profits from agreeing to a deal.
What elements of the institutional context of a water 
market trade (specifically a 1-year lease) are most 
important to senior water rights holders?  Do irrigators 
(as sellers) prefer….
• to lease to other irrigators over environmental or 
municipal buyers?
• to lease their water rights for only part of the 
growing season (split season leases)?
• to lease through a non-profit water bank or a state-
run bank?
If so, what compensating differentials (premia) might 
the irrigators demand for different leasing scenarios?
Finally, do experiments using student participants, the 
typical participants in existing water market 
experiments,  give comparable results?  We focus only 
on the irrigator results in this poster.
Figure 1.  Study 
location: Yakima River 
Basin, WA
several attributes of the lease varied across tasks (Figure 
2).   We randomly chose one of the ~ 20 choices and 
paid participants in cash based on the earnings of their 
hypothetical farm in that round .  We replicated the 
experiment with 38 UW undergraduates, though with 
lower cash payments.  
Source: USGS
Figure 3.  Predicted participation by percent 
of opportunity cost
Notes:   n=49 irrigators, 756 total choice observations. Includes data from both single buyer and 
multiple buyer rounds.  *  denotes significance at  the 10% level,  **  at 5%,  and  ***  at 1% levels 
of significance.  Excluded categories:  Dept. Ecology as buyer.
Table 1. Choice modeling results
j0
j1
We analyze the data using a random parameters logit  (RPL) 
approach. We specify the following model, where V0 is the 
indirect utility of rejecting a lease offer and continuing to 
farm and Vj is the indirect utility of accepting the lease:
Ecology, 
Full
Irr. 
District, 
Split
Irr. 
District, 
Full
Developer, 
Split
Developer, 
Full
Ecology, 
Split
$17.47
(26.9%)
-$4.48
(-6.9%)
$12.19
(18.8%)
$10.69
(16.4%)
$30.42
(46.8%)
Ecology, 
Full
0 -$19.04
(29.3%)
-$4.48
(-6.9%)
-$5.77
(-8.9%)
$10.69
(16.4%)
Irr. District, 
Split
0 $17.47
(26.9%)
$15.88
(24.4%)
$36.98
(56.9%)
Irr. District, 
Full
0 -$1.34
(-2.1%)
$15.88
(24.4%)
Developer, 
Split
0 $17.47
(26.9%)
Table 2.  Average premia required to make offer j1
as attractive as offer j0
Multinomial logit Random parameters logit
Coefficient Estimate Est./s.e. Estimate Est./s.e.
Lease characteristics
Irr. District 0.32** 2.02 0.62* 1.93
Developer -0.77*** -3.91 -1.39*** -4.18
Split season (b) 1.13*** 7.02 2.19*** 4.43
Split season (s) -- -- 3.76*** 3.57
Offer price (b) 0.12*** 3.67 0.21*** 3.06
Offer price (s) -- -- 0.018 1.44
Offer price2 -4.1E-4*** -2.62 -6.0E-4** -2.04
Nonprofit bank (b) 0.064 0.47 0.22 0.03
Nonprofit bank (s) -- -- 0.033 0.03
Opt-out (ASC) 1.75 0.65 3.16 0.461
Respondent characteristics
Risk aversion (b) 1.33*** 2.99 1.81 1.43
Risk aversion (s) -- -- 0.64*** 2.70
2nd year of hay 2.16** 2.24 4.79* 1.72
Risk * 2nd year -0.34* -1.70 -0.56 -0.99
Risk * offer price 0.0037 1.52 0.0064 1.41
Age 0.16*** 4.33 0.32*** 2.80
Male -0.28 -1.15 -0.95 -1.41
Educ -0.57*** -6.39 -1.31*** -3.87
Farm 0.46 1.56 1.49* 1.88
Water Mkt Exper. -0.86*** -2.92 -1.96** -2.30
Age*Risk  -0.023*** -3.36 -0.039* -1.94
Log likelihood -525.28 -524.47
We find that non-monetary attributes are important to 
participants.  Sellers prefer to lease to another irrigation 
district rather than the Dept of Ecology, or (especially) a 
developer.  They prefer split-season leases.  They are less 
likely to accept a lease if they are currently farming, and 
more likely to accept if they are younger, have water market 
experience, or have higher levels of education.
% split season opp. cost
% full season opp. cost
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Prepared  for the Agricultural & Applied Economics Association’s 2011 AAEA & NAREA Joint Annual Meeting, Pittsburgh, Pennsylvania, July 24- 26, 2011.

Unlocking water markets: an experimental approach

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