Expectations in Water-right Prices

Abstract

Water markets are increasingly being used and promoted as an economically efficient means to transfer water rights. Knowledge of water-right price determinants and trends is important in developing markets, and in evaluating the comparative benefits and costs of water supply alternatives. Potential determinants of homogeneous water-right prices are identified, and a two-equation model based on rational expectations theory is developed. The model is tested using empirical evidence from the established market for Colorado-Big Thompson water rights. The model results support observations that returns to water in irrigation do not adequately explain the level of water-right prices. Socioeconomic and speculative factors are found to explain successfully the variations in historical prices, and appear to play a substantial role in water-right price formation. These findings have important implications in assessing the benefits of proposed water-transfer policies.