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Abstract
The system of prior appropriation in the Western Unites States prioritizes property
rights for water based on the establishment of beneficial use, creating a hierarchy
where rights initiated first are more secure. I estimate the demand for secure water
rights through their capitalization in agricultural property markets using spatially
explicit water rights data in the Yakima River Basin, a major watershed in
Washington State. The Yakima River watershed, like many Western watersheds,
satisfies all water claims during an average year so the benefits of secure water
rights stem from protection against water curtailment during drought years. Thus
the relative value of secure property rights is a function of water supply volatility
because the costs of droughts are predominantly born by those with weak rights. In
a hedonic price model I find that farmers pay a premium of 9-12% for more secure
water rights. I use Bayesian model averaging to deal with model uncertainty and
the potential omitted variable bias prevalent in hedonic analysis. An endogenous
change point model tests whether the premium on a senior right varies over time,
potentially in response to expectations about climate change. The results fail to
confirm that farmers’ expectations about future water supply volatility are
manifested in agricultural water markets.