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
Article

Abstract

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 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. California Department of Water Resources (1994), ‘California Water Plan Update, vol. 1’, Bulletin 160-93, California Department of Water Resources.Google Scholar
  2. Easter, K. W., M. W. Rosegrant and A. Dinar, eds. (1998), Markets for Water: Potential and Performance. Norwell, MA: Kluwer Academic Publishers.Google Scholar
  3. Howitt, R. E. (1995a), ‘A Calibration Method for Agricultural Economic Production Models’, Journal of Agricultural Economics 46, 147-159.Google Scholar
  4. Howitt, R. E. (1995b), ‘Positive Mathematical Programming’, American Journal of Agricultural Economics 77, 329-342.Google Scholar
  5. Kagel, J. H. (1995), ‘Auctions: A Survey of Experimental Research’, in J. H. Kagel and A. E. Roth, eds., The Handbook of Experimental Economics. Princeton, NJ: Princeton University Press, pp. 501-585.Google Scholar
  6. Kruse, J. B. (1991), ‘Contestability in the Presence of an Alternate Market: An Experimental Evaluation’, Rand Journal of Economics 22, 136-147.Google Scholar
  7. McCabe, K. A., S. J. Rassenti and V. L. Smith (1989), ‘Designing ‘smart’ Computer-Assisted Markets: An Experimental Auction for Gas Networks’, European Journal of Political Economy 5, 259-283.Google Scholar
  8. McCabe, K. A., S. J. Rassenti and V. L. Smith (1991), ‘Smart Computer-Assisted Markets’, Science 254, 534-538.Google Scholar
  9. McCabe, K. A., S. J. Rassenti and V. L. Smith (1993), ‘Designing a Uniform-Price Double Auction’, in D. Friedman and J. Rust, eds., The Double Auction Market: Institutions, Theories, and Evidence. Reading, MA: Addison-Wesley.Google Scholar
  10. Plott, C. R. (1987), ‘Dimensions of Parallelism: Some Policy Applications of Experimental Methods’, in A. E. Roth, ed., Laboratory Experimentation in Economics: Six Points of View. New York: Cambridge University Press, pp. 193-219.Google Scholar
  11. Rassenti, S. J., S. S. Reynolds and V. L. Smith (1994), ‘Cotenancy and Competition in an Experimental Auction Market for Natural Gas Pipeline Networks,’ Economic Theory 4, 41-65.Google Scholar
  12. Smith, V. L. (1980), ‘Relevance of Laboratory Experiments to Testing Resource Allocation Theory’, in J. Kmenta and J. Ramsey, eds., Evaluation of Econometric Models. New York: Academic Press.Google Scholar
  13. Smith, V. L. (1982), ‘Microeconomic Systems as an Experimental Science’, American Economic Review 72, 923-955.Google Scholar
  14. U.S. Department of the Interior (1997), ‘Central Valley Project Improvement Act Draft Programmatic Environmental Impact Statement’, Technical appendix, Vol. 8, U.S. Department of the Interior, Bureau of Reclamation.Google Scholar

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

Personalised recommendations