The Value of Heterogeneous Property Rights: The Costs of Water Volatility

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.

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 Record created 2017-04-01, last modified 2018-01-22

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