The Illiquidity of Water Markets

73 Pages Posted: 2 Oct 2015 Last revised: 1 Sep 2021

See all articles by Javier D. Donna

Javier D. Donna

University of Florida

José-Antonio Espín-Sánchez

Yale University; Yale University - Cowles Foundation; Economic Growth Center

Date Written: April 5, 2021

Abstract

We investigate the efficiency of a market relative to a non-market institution—an auction relative to a quota—as allocation mechanisms in the presence of frictions. We use data from water markets in southeastern Spain and explore a specific change in the institutions to allocate water. On the one hand, frictions arose because poor farmers were liquidity constrained. On the other hand, wealthy farmers who were part of the wealthy elite were not liquidity constrained. We estimate a structural dynamic demand model under the market by taking advantage that water demand for both types of farmers is determined by the technological constraint imposed by the crop’s production function. This approach allows us to differentiate liquidity constraints from unobserved heterogeneity. We use the estimated model to compute welfare under market and non-market institutions. We show that the institutional change from markets to quotas increased efficiency for the farmers considered.

Keywords: Market Efficiency, Dynamic Demand, Auctions, Quotas, Vertical Integration, Financial Markets

JEL Classification: D02, G14, L11, L13, L42, L50

Suggested Citation

Donna, Javier D. and Espin-Sanchez, Jose-Antonio, The Illiquidity of Water Markets (April 5, 2021). Available at SSRN: https://ssrn.com/abstract=2667654 or http://dx.doi.org/10.2139/ssrn.2667654

Javier D. Donna (Contact Author)

University of Florida ( email )

Gainesville, FL 32606
United States

HOME PAGE: http://www.jdonna.org/

Jose-Antonio Espin-Sanchez

Yale University ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States
2034320890 (Phone)

HOME PAGE: http://campuspress.yale.edu/espin/

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

Economic Growth Center ( email )

Box 208269
New Haven, CT 06520-8269
United States

HOME PAGE: http://https://egcenter.economics.yale.edu/

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