Efficiency of Water Markets under Prior Appropriation: Evidence from Permanent Water Rights Sales in Nevada
Throughout much of the semiarid West, water is managed by states under the legal doctrine of prior appropriation, where those with the earliest claim to a beneficial use of water have the first right to use that water in times of scarcity. In Nevada, as in other western states facing water scarcity concerns, there have been efforts to adopt new formal water market institutions to encourage water conservation and achieve a more efficient allocation of the state's water supply. Many such proposals are based on the assumption that voluntary exchanges under the existing prior appropriation system do not result in efficient reallocation of water. In this paper, we study water right-level and basin-level drivers of prices of water right sales to evaluate the efficiency of water rights markets under prior appropriation in Nevada. We use a new dataset of all reported water rights sales in Nevada between 2006 and 2019. Our findings show that characteristics of water rights, buyers and sellers, and basins all significantly affect the transaction price of a given water right. We find a price premium for more reliable rights, with a 4.1% decrease in price for every ten years after the earliest priority date in the basin, and no significant price difference between groundwater rights and surface water rights. Our model shows that M&I buyers purchase at only 12% higher prices than agricultural users when controlling for the types of rights purchased and basin of purchase. This suggests that the conclusions of previous literature that many water markets are inefficient may be a result of agriculture, mining, and M&I buyers being represented differently across geographically distinct markets. Finally, through utilizing an instrumental variable, we show that transaction volume has no significant effect on prices. Based on a Nash bargaining framework, our findings suggest that bargaining power lies more in the hands of sellers than buyers of water rights. These findings suggest that prior appropriation water markets may be efficient at allocating water between uses. This motivates investments in infrastructure rather than new water market institutions for addressing water scarcity.
economics, efficiency, nevada, prior appropriation, water markets, water rights
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