Markets for Water: All-in Auctions
Abstract: Command and control or regulatory reallocation of water among those who own rights and/or those who want to use water is hard to plan and frequently puts water in the wrong places at the wrong prices. Market allocation can be more efficient but may suffer from "illiquidity," i.e., low participation among potential sellers. I propose a hybrid system in which regulators force full participation but allocation is decided through market forces, i.e., an All-in Auction (AiA). The AiA has four important features: 1) Water owners can opt out by bidding for the same number of units (as buyers) as they are selling. This means that the AiA does not result in regulatory taking. 2) Because all participants are bidding to buy water, the AiA design circumvents a common problem in auctions, i.e., endowment effects (the gap between willingness to pay and accept) that reduce the number of transactions. 3) Because ALL water is up for sale, it is possible to achieve the maximum number of trades and thus maximize the benefits from redistribution. This means that the AiA avoids participation effects. 4) The AiA can be opened to as many participant groups (e.g., urban, agricultural, environmental) as necessary. As participation increases, the social benefit of the AiA also increases. I will present these theoretical advantages and give an update on lab and field experiments designed to test and implement the AiA among farmers in irrigation districts.
