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Option contracting in the California water market

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Abstract

Temporary water transfers, as achievable under option contracts, capture gains from trade that would go unrealized if only permanent transfers of water rights were possible. This paper develops a bilateral option contracting model for water which includes the possibility of conveyance losses and random delivery. Seller-optimal and socially optimal option contracts are characterized in terms of relevant base and strike prices, as well as contract volumes, from an ex-ante and an ex-post point of view. Lastly, welfare gains are estimated, and actual contract prices in California are compared to model-predicted prices.

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Authors and Affiliations

  1. Department of Management Science and Engineering, Terman Engineering Center, Stanford University, Stanford, CA, 94305-4026, USA

    Claire D. Tomkins & Thomas A. Weber

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  1. Claire D. Tomkins
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  2. Thomas A. Weber
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Correspondence to Thomas A. Weber.

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Tomkins, C.D., Weber, T.A. Option contracting in the California water market. J Regul Econ 37, 107–141 (2010). https://doi.org/10.1007/s11149-009-9107-2

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  • DOI: https://doi.org/10.1007/s11149-009-9107-2

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