Topic: The Effects of Water Markets: Evidence from the Rio Grande

Speaker: Tianshu Li, University of Virginia

Time: March 23rd, 2018, 13:30–15:00

Venue: Conference Room106, Zhonghui Building

Abstract:

Water markets are cap and trade systems that allow for sales and leases of the right to use water (without selling the land title). With increased water scarcity due to population growth, economic development, and climate change, water markets are increasingly popular across the globe. Like other tradable allowance markets, a fundamental theoretical prediction of water markets is to shift resources towards more productive uses. Our paper directly tests this conjecture by comparing the change in crop composition in the water market counties with their neighboring control counties before and after the market initiated. In a literature that is dominated by simulations studies, this paper is the first difference-in-difference analysis of the actual long-term impact of water markets on agricultural production. The Rio Grande water market in Texas started in 1971, and is one of the oldest and most established ones in the US. Using agricultural census data from 1954 to 2012, we provide empirical evidence that water markets facilitate a shift from less productive crops that generate on average less dollars per unit of water to ones that are more productive. We observe most prevalent adjustment of the crop composition in times of drought and a shift towards more drought resistant crops. Moreover, an on-going project to extend the analysis to water allocations between agriculture and non-agriculture will also be discussed using evidence from the Murray-Darling Basin of Australia.