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Futures Contracts in Water Leasing: An Experimental Analysis Using Basin Characteristics of the Rio Grande, NM

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Abstract

Providing for increased water demands during periods of persistent drought and climatic variability may require water managers, users and planners to think differently about how water resources are allocated. A water marketing institution that allows water rights holders to reallocate water on a temporary basis could overcome these challenges with minimal conflict. In this paper, a water marketing institution that allows for the temporary reallocation of water rights in a spot and futures market is investigated. The results provide insight into three key questions: (1) how does trading impact the physical system, (2) does the value of water differ by trading agents, (3) how is economic welfare redistributed as a result of trading? Results of experimental treatments display minor impacts to the physical system, that prices differ across the different type of trading agents and the addition of a futures market has the ability to decrease market prices while increasing economic welfare as a futures market allows users to hedge against future water uncertainty.

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Notes

  1. For instance the southwestern states are a semi-arid environment with little surface water flow, while the Pacific Northwest has large rainfall amounts with large surface water flows.

  2. Current practices in the basin are that all water rights are adjudicated as 1907 priority under the doctrine of prior appropriation, creating a setting of homogenous water rights (see Phillips et al. 2011).

  3. These reports stated that either an average water year would occur or a dry water year would occur without an estimate of inter-season water availability or across season availability.

  4. Three treatments were conducted for each of the water allotment scenarios in the two different market settings, trading within the four months of a growing season and trading across the growing seasons.

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Author information

Authors and Affiliations

  1. Department of Economics, Brigham Young University-Idaho, 525 S. Center Street, Rexburg, ID, 83460, USA

    Craig D. Broadbent

  2. Department of Economics, University of New Mexico, 1 University of New Mexico MSC05-3060, Albuquerque, NM, 87131, USA

    David S. Brookshire

  3. Harris School of Public Policy, University of Chicago, 1155 E. 60th Street, Chicago, IL, 60637, USA

    Don Coursey

  4. Sandia National Laboratory, Earth Systems Department, P.O. Box 5800, Albuquerque, NM, 87185, USA

    Vince Tidwell

Authors
  1. Craig D. Broadbent
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  2. David S. Brookshire
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  3. Don Coursey
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  4. Vince Tidwell
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Corresponding author

Correspondence to Craig D. Broadbent.

Additional information

This material is based upon work supported in part by SAHRA (Sustainability of semi-Arid Hydrology and Riparian Areas) under the STC Program of the National Science Foundation, Agreement No. EAR-9876800, and SILPE (Science and Impact Laboratory for Policy and Economics) under the U.S. Geologic Survey’s Science and Decision Center, Sponsor #G10AC00303.

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Broadbent, C.D., Brookshire, D.S., Coursey, D. et al. Futures Contracts in Water Leasing: An Experimental Analysis Using Basin Characteristics of the Rio Grande, NM. Environ Resource Econ 68, 569–594 (2017). https://doi.org/10.1007/s10640-016-0032-4

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