Environmental and Resource Economics

, Volume 17, Issue 4, pp 375–394 | Cite as

The Design of ``Smart'' Water Market Institutions Using Laboratory Experiments

  • James J. Murphy
  • Ariel Dinar
  • Richard E. Howitt
  • Steven J. Rassenti
  • Vernon L. Smith


One of the problems with proposals for substantialinstitutional change in water systems is thatmodification and irreversibility make the processslow, cautious and costly to society. In this paper,we discuss the role that experimental economics canplay in evaluating proposed institutional changes tohelp facilitate a more rapid and smooth adoption ofchanges in the water system. Experimental economicsyields a formal and replicable system for analyzingalternative market structures before they are actuallyimplemented. For example, a water market can bedeveloped and tested in the laboratory under supplyand demand constraints that reflect drought conditionsthat might occur in California, or other arid regionsin the world. We present a prototype of a Californiawater transfer model and the results from a series ofwater market experiments. Results include realizedmarket efficiency and surplus distribution, as well asan analysis of market price volatility. Theimplications of this research extend well beyondCalifornia water markets, not only to water markets inother arid regions, but also to the design of marketsfor other environmental goods, including tradablepollution permits and fishery ITQs.

auctions laboratory experiments mechanism design water markets 


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Copyright information

© Kluwer Academic Publishers 2000

Authors and Affiliations

  • James J. Murphy
    • 1
  • Ariel Dinar
    • 2
  • Richard E. Howitt
    • 3
  • Steven J. Rassenti
    • 4
  • Vernon L. Smith
    • 4
  1. 1.Department of Resource Economics, and Center for Public Policy and AdministrationUniversity of MassachusettsAmherstUSA
  2. 2.Rural Development DepartmentWorld BankWashington
  3. 3.Department of Agricultural and Resource EconomicsUniversity of CaliforniaDavis
  4. 4.Economic Science LaboratoryUniversity of ArizonaTucson

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