The Illiquidity of Water Markets: Efficient Institutions for Water Allocation in Southeastern Spain

Abstract

We investigate the efficiency of a market institution (an auction) relative to a non- market institution (a quota) as a water allocation mechanism in the presence of frictions, by exploring a particular historical institutional change in Mula, Spain. We estimate a structural dynamic model under the auction accounting for the three main features in the empirical setting: intertemporal substitution, liquidity constraints, and seasonality. We use the estimated model to compute the welfare under auctions, quotas, and the highest-valuation allocation. We find that the institutional change in Mula, from auctions to quotas, was welfare improving for the apricot farmers considered.

Keywords: Institutions, Financial Markets, Demand, Dynamic Bidding, Market Efficiency

JEL Classification: D02, D53, L11, L13, G14, Q25