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Transaction costs and trading behavior in an immature water market

Published online by Cambridge University Press:  02 October 2002

Janis Carey
Division of Economics and Business, Colorado School of Mines.
David L. Sunding
Department of Agricultural and Resource Economics, UC Berkeley.
David Zilberman
Department of Agricultural and Resource Economics, UC Berkeley.


Water scarcity is a constraint on economic activity in many regions, and improving the allocation of water is an important part of the process of economic development. Economists have advocated water markets as a way to increase efficiency and to cope with environmental problems. Unfortunately, actual water markets, including those in developed countries, usually fall far short of this ideal. The paper considers the allocation of water by markets that are only imperfectly developed, in which prices are not publicly known and in which there is no centralized trading location. These limitations impose transaction costs on buyers and sellers, that is costs associated with completing a transaction. A conceptual model of the effect of transaction costs on trading patterns is developed. Stylized results are tested using data from an informal water market in California. The paper concludes with a description of the importance of transaction costs, comments on the transition to more formal water markets, and policy recommendations.

Research Article
© 2002 Cambridge University Press

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This research was financed by a Challenge Grant from the US Bureau of Reclamation. The opinions expressed in this paper do not necessarily reflect those of the funding agency.