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The Illiquidity of Water Markets: Efficient Institutions for Water Allocation in Southeastern Spain

Donna, Javier and Espin-Sanchez, Jose (2018): The Illiquidity of Water Markets: Efficient Institutions for Water Allocation in Southeastern Spain.

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Abstract

We investigate the efficiency of a market institution (an auction) relative to a non- market institution (a quota) as a water allocation mechanism in the presence of frictions, by exploring a particular historical institutional change in Mula, Spain. We estimate a structural dynamic model under the auction accounting for the three main features in the empirical setting: intertemporal substitution, liquidity constraints, and seasonality. We use the estimated model to compute the welfare under auctions, quotas, and the highest-valuation allocation. We find that the institutional change in Mula, from auctions to quotas, was welfare improving for the apricot farmers considered.

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