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Abstract
Previous research on water trading has focused on surface water trading and theoretical
approaches to analyzing groundwater trading. Empirical analysis of groundwater trading is a new
area of study due in part to the previous lack of recorded usage, trade data and binding
constraints on groundwater use by landowners. Groundwater trading can help move water from
low-value to high-value areas of use for the benefit of the participating traders and general
public. The paper predicts participation in groundwater trading and the directions of trades
among participants. Specifically, the paper considers both formal and informal trading of
groundwater used for crop irrigation purposes and attempts to identify those characteristics that
predict the probability of trade participation and whether an individual is a buyer or seller of
groundwater rights. Results from this research indicate a strong desire to participate in trades, but
high transactions costs have limited the number of trades that have occurred. Utilizing empirical
models improves the accuracy of predicting trade participation and direction, and therefore the
accuracy of models of trade effects on water supplies and stream flows used in policy and
decision making.