Municipal Risk and Time Preferences in Western Water Transactions

Abstract

Markets for water rights have the potential to increase allocative efficiency of perhaps the scarcest natural resource in the western United States. Due to several features of markets in the region, they are best modeled by game theory. The Rubinstein Bargaining Model can be appropriately adapted to the case of bilateral negotiations for water rights, and predicts that the time preferences of players impact the outcome. It is also possible to model the effect of risk and municipal risk preferences relating to the available supply of water, which microeconomic theory predicts will also affect outcomes. While previous literature has written about various determinants of water market outcomes, little attention has been paid to the empirical measurement and testing of the effect of time preferences and risk in these markets. In this thesis, I attempt to bridge this gap between the theory and empirical analyses by testing theoretical predictions using both a well-known data set and a novel one. I find moderate evidence suggesting that a greater time preference results in a less favorable outcome, and that buyer risk-aversion is a disadvantage in bargaining when risk is present.