Water leasing: An evaluation of prototype markets using experimental economics

The last two decades have witnessed the application of economic markets to address problems of environmental policy over a range of areas including the removal of lead from gasoline, the reduction of acid rain producing sulfur dioxide from the atmosphere and the limiting of carbon dioxide emissions. Markets have also been successfully utilized outside of the environmental policy arena to address policy problems made complex by the laws of physics such as the trading of electricity in a network and the combinatoric auction used to allocate scarce airport landing and take-off slots. However, during this same period, little attention has been given to the application of markets to a most fundamental and important commodity, water.;This dissertation considers the issues that have led to the further consideration of a water market. Specifically, this dissertation considers water markets that allow the temporary transfer (lease) of a water right as one possible mechanism to provide flexibility to water managers to fulfill water demands in over-allocated watersheds. A coupled model is developed to incorporate the natural, physical and engineering dynamics of the Middle Rio Grande Basin in New Mexico with the behavioral characteristics of a variety of water users in the basin. This coupled model is displayed through an online trading interface where student subjects are utilized to test the feasibility of this model to examine its ability to provide flexibility in water management.;This coupled (economic and hydrologic) model is tested in three distinct sets of economic experiments. The first set of economic experiments can be found in Chapter 2. In these experiments participants assumed the role of different economic agents and the coupled model examines the effects of market transactions upon the physical setting while also analyzing the efficiency of the market. The findings of these initial experiments were presented to water experts in New Mexico where it was suggested that a second set of experiments be conducted to capture the complex decision making process that agricultural users engage in each growing season.;Chapter 3 of this dissertation details the more realistic agricultural experiments and compares them to the initial set of experiments found in Chapter 2. In these complex agricultural experiments, participants are allowed to select different crop types and acreages for these crops over three different growing seasons. This process allows for an examination of the effects a leasing market can have upon different agricultural crops (i.e. a cash crop that has a minimal capital investment and a capital crop with a large capital investment). In addition, the complex agricultural experiments found in Chapter 3 examine seasonal effects as trading occurs throughout a growing season.;Chapter 4 of this dissertation examines the effects of a water leasing market by allowing participants to trade through time using futures contracts. A futures contract has been successfully applied as a mechanism to hedge against volatility in a market while allowing for opportunists to speculate about future market prices in the exchange of commodities, foreign exchange, financial products, metals, food and energy. To date, futures contracts have not been applied to water leasing (temporary transfer) markets. This Chapter analyzes the effects of futures contracts under two sets of market experiments (trading within a single growing season, trading within a single growing season and into the next growing season). Conducting these two sets of experiments allows for an analysis of a futures contract in short term planning (within a growing season only) and in long term planning (within and across growing seasons).;Each of the main Chapters (Chapters 2--4) contain specific results from the market experiments that are described in the Chapter. The final Chapter contains some general conclusions from all of the experiments and presents some possible extensions to this dissertation.