Estimating the Benefits to Strengthening Water Markets

Estimating the Benefits to Strengthening Water Markets
Christopher Knittel, George P. Shultz Professor, Sloan School of Management

Period of performance: 

September 2016 to August 2018

Abstract: 

Fresh water is increasingly scarce in many parts of the world, and current resource management regimes may not be adequate for increasing climate uncertainty and rising population pressures. Markets have great potential to improve efficiency of water allocation, reduce conflicts over resources, adapt to climate variability, and build a more resilient economy. In this project, we will study the potential of water markets in California, where water markets exist but are underdeveloped. We aim (1) to measure the overall potential economic benefits from strengthening water markets, and (2) to identify and quantify the most important barriers to greater use of water markets in the state. To achieve this, we will use a new dataset on water transactions in California that is significantly more comprehensive than ever before used by researchers. We will combine this with novel quasi-experimental estimation methods in a new approach that sidesteps the need to directly model the motivations of water users, yielding results that account for real-world frictions and behavior.