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Abstract
Institutions for use of natural resources, including water resources, typically encompass
assignments of property rights to various levels of government, private entities and commonproperty
organisations. Institutional reform often involves a change in these property rights,
such as devolution of property rights from governments to private resource users.
In institutional economics it is generally accepted that institutional change occurs to reduce
transaction costs incurred in economic exchanges and regulatory actions. In many situations,
including reform of institutions for use of water resources, there are two additional
parameters that affect, or should affect, decisions for institutional change: (i) constraints
arising from institutional history; and (ii) option values associated with some institutional
structures under conditions of uncertainty about the future. In this paper, a transaction-cost
framework is used to incorporate these parameters into decision-making for institutional
change. Institutional reform for water use in the Murray-Darling Basin is used as an
illustrative example.