Coase and Colorado: Exploring the Effects of Transaction Costs on Water Markets

Abstract

Price theory analysis teaches us that, as the cost of using markets rises (ie transaction costs), we will expect to see either higher prices in the market, lower activity, or some combination of the two. We have a natural experiment to test this hypothesis in water exchange markets in Colorado. Colorado has a Byzantine regulatory process governing water market transactions. In 2003, Colorado passed legislation with the goal of streamlining the exchange process in certain cases. Using a regression analysis and regression discontinuity design, I find Colorado's law change in 2003 had a statistically significant effect on water exchange prices in Colorado.

Keywords: Coase, Environmental Economics, Colorado, Water Markets

JEL Classification: K32, Q25, D47