The Economics of First Possession Rights to a Heterogeneous Resource: Prior Appropriation Rights to Water
Abstract: We analyze the economics of first-possession property rights to a large heterogeneous resource allocated under incomplete information and competitive claiming by agents. Our focus is on prior-appropriation surface water rights used in 18 western US states and generally in at least 3 western Canadian provinces, with specific attention to Colorado, 1852-2013. Prior appropriation was an institutional innovation, replacing common-law riparian rights, in a setting where water supplies were scarce, unevenly distributed, and remote from production sites where water was a key input. Prior appropriation encouraged valuable search and narrowed the information required to establish ownership to that described in immediate water diversion rather than an entire river basin. At the time of claiming water there was little information about water source characteristics, and the process of claiming revealed such information. Hence, there was a tradeoff between claiming at a particular time and waiting. At any time, water rights claimants were equal in their lack of knowledge of the best water diversion locations. Each round of claiming revealed new information, but the quantities of remaining high-quality diversion sites were reduced. Individual claims were based on observable resource characteristics, such as current stream flow or quantity, distance to stream head, terrain topography, and proximate soil quality. Prior appropriation water rights became the basis for water trade, investment in dams and canals, and expansion of irrigated agriculture and other activities critical for economic development. Prior appropriation rights endure, affecting the distribution of water ownership and exchange. Assessment of the prior appropriation’s welfare effects requires accounting for its role in generating property rights to water, investment, production, and the transaction costs of water exchange.
