| Despite the claim that water markets enhance agricultural performance, there is relatively little evidence on their actual operation. This thesis explores the operation of the spot water market in the Limari Valley in Chile. Data were collected from this valley in 1996--1997, a period of severe drought. Escalating water prices, high price volatility and increasing market uncertainty during this period led a significant proportion of Limari Valley producers to question the value of water markets.;Beginning with a micro-theoretic model, this thesis explores the hypothesis that water market instability is a systematic feature of agriculture characterized by fixed cost investment and permanent crops. In such a world, an investment coordination failure occurs as permanent crops make water demand rigid, resulting in price volatility when water supply shocks occur. In the case of the Limari Valley, the model implies that the investment in permanent crops that fueled economic development also rendered the water market less effective. Econometric estimates of water market participation confirm the general outlines of the model and give quantitative dimension to the range of prices over which the water market is rigid. |
