The value of heterogeneous property rights and the costs of water volatility

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Abstract

The system of prior appropriation in theWestern Unites States prioritizes property rights for water based on the establishment of beneficial use, creating a hierarchy where rights initiated first are more secure. I estimate the demand for security in water rights through their capitalization in agricultural property markets in the Yakima River Basin, a major watershed in Washington State. All water rights are satisfied in an average year, so the relative value of secure property rights is a function of water supply volatility and the costs of droughts are predominantly born by those with weak rights. In aggregate, security in water rights does not capitalize into property values at the irrigation district level; however, there is heterogeneity in the premiumfor secure water rights. The lack of a premiumfor district-level water security is robust to a variety of econometric methods to account for correlated district unobservables, and the null result produces an economically significant upper bound on the value to water security for the district. The ability for farmers to adapt to water supply volatility, as well as expectations about water markets and government infrastructure investment, are leading explanations for the lack of an aggregate premium. These explanations are supported by the pattern of heterogeneity in the water security premium.

Original languageEnglish (US)
Pages (from-to)73-102
Number of pages30
JournalAmerican Journal of Agricultural Economics
Volume99
Issue number1
DOIs
StatePublished - Jan 1 2017

All Science Journal Classification (ASJC) codes

  • Agricultural and Biological Sciences (miscellaneous)
  • Economics and Econometrics

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