Upstream Market Power in Water Transfers

Abstract

Water transfers are generally considered beneficial when both parties in the transaction have different marginal values of water use. In most cases transfers are negotiated between buyers and sellers in a bilateral monopoly setting. Imperfections in water markets create opportunities for buyers or sellers to benefit from asymmetric bargaining ability and market power. This thesis models the negotiation process for water transfers between agricultural irrigation districts and urban municipal providers using bargaining theory. By looking at the outcome of a transfer contract as the result of a bargaining game, I am able to derive comparative statics on the effects of market power and bargaining ability on prices and quantities. The comparative statics are then tested empirically using data from western water transfers during the period from 1990-2004. The empirical evidence in support of the theoretical predictions is mixed.