Expectations in Water-right Prices

TLDR

Water markets are increasingly used as an efficient means to transfer water rights, and understanding price determinants is crucial for market development and evaluating alternatives. The study aims to identify determinants of homogeneous water‑right prices and develop a two‑equation rational‑expectations model. The model is empirically tested with data from the Colorado‑Big Thompson water‑rights market. The results show that irrigation returns fail to explain price levels, while socioeconomic and speculative factors account for price variation, highlighting implications for water‑transfer policy assessment.

Abstract

Water markets are increasingly being used and promoted as an economically efficient means to transfer water rights. Knowledge of water-right price determinants and trends is important in developing markets, and in evaluating the comparative benefits and costs of water supply alternatives. Potential determinants of homogeneous water-right prices are identified, and a two-equation model based on rational expectations theory is developed. The model is tested using empirical evidence from the established market for Colorado-Big Thompson water rights. The model results support observations that returns to water in irrigation do not adequately explain the level of water-right prices. Socioeconomic and speculative factors are found to explain successfully the variations in historical prices, and appear to play a substantial role in water-right price formation. These findings have important implications in assessing the benefits of proposed water-transfer policies.