Behavioral Impediments to Water Transfers: Some Evidence from California Groundwater Management
Abstract: As water becomes increasingly scarce relative to demand, it becomes increasingly urgent to maximize the value that we derive from it. For years, economists have been advocating increased reliance on water markets as a means of rationalizing water use, the objective being to facilitate the allocation of water to its highest-value uses. Yet in many parts of the arid West, water markets have been surprisingly slow to take hold. Economists have pointed to various sources of transaction costs, especially associated with state law and also the administration of the state’s permit system and rules established by government entities, especially state and federal agencies. I suggest here another possibility, which is that there may be behavioral factors that influence the willingness of sellers to engage in water transfers, including loss aversion and an endowment effect. I offer some tentative corroborative evidence from three separate sources: the literatures of rural sociology and the political economy of agricultural policy, and a database of groundwater management plans developed by special agencies in California.
