Economic Organization and the Structure of Water Transactions

This paper analyzes the structure of water transactions using data on contract duration from California. Water rights in the western United States are transferred through short-term and long- term leases as well as permanent ownership contracts. We test predictions about the type of water contracts derived from the literature on economic organization by using ordered probit models to investigate the correlates of contract duration. We confirm that long-term and permanent contracts are more likely when investments in specific assets are required for conveyance. We also find that longer-term arrangements are common when buyers with uncertain water supplies purchase from sellers with more certain rights, suggesting that urban municipalities use long-term contracts to reduce risk. We do not find robust evidence supporting the hypothesis that short-term agreements are more likely when the costs of transfer to third parties are potentially high.