Economic Analysis of Property Rights: First Possession of Water in the American West

Bryan Leonard (Arizona State University)
Gary Libecap (UCSB and NBER)

Abstract: We analyze the economic determinants and long-run effects of prior appropriation surface water rights from 1852 to 2013 and show how formal property rights developed to generate the discovery of new information and serve as coordinating institutions for investment under uncertainty. Prior appropriation replaced common-law riparian water rights in an immense area of 1,808,584 mi2 on the U.S. western frontier within 40 years, suggesting large economic benefits. We develop a model to demonstrate that when information about resources is costly, prior appropriation facilitates socially valuable search, coordination, and investment by reducing uncertainty about resource conditions and the threat of new entry. We derive testable hypotheses about the behavior of claimants under these conditions and test our hypotheses using a novel data set that includes the location, date, and size of water claims along with measures of infrastructure investment, irrigated acreage, crops, topography, stream flow, soil quality, precipitation, and drought in eastern Colorado, where prior appropriation first became extensive. We find that search effort lowered claiming costs for subsequent claimants. Secure property rights to water and controls on new entry doubled average infrastructure investment and raised total irrigated acreage and value of agricultural output by approximately 134% in our sample years. The economic returns to prior appropriation were lower in Hispanic areas of Colorado where informal sharing norms were in place. In cohesive, small communities a formal property rights system was not required to coordinate investment and resource management. Our analysis extends the literatures on institutional change, property rights, and first possession and informs the debate over the efficiency of prior appropriation and the costs of proposed water rights reforms.

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