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We explore a particular historical episode that switched from a market institution auctions to a non-market institution fixed quotas with a ban on trading to allocate water. This water is used by farmers for agricultural purposes; some of the farmers are liquidity constraints. We present a model in which farmers face liquidity constraints to explain why the change took place. From a positive perspective, we show that demand is underestimated if these liquidity constraints are not taken into account. We use a dynamic discrete choice model to estimate demand during the auction period; we also estimate the probability of being liquidity constrained by a farmer. From a normative perspective, auctions achieve the first-best allocation only in the absence of liquidity constraints; the quota achieves the first best allocation only if farmers are homogeneous in productivity. We compute the welfare under both institutions using the estimated parameters of the structural model.

Item Type: MPRA Paper -

Original Title: The Illiquidity of Water Markets-

English Title: The Illiquidity of Water Markets-

Language: English-

Keywords: Organization of Production, Institutions, Financial Markets, Market Efficiency, Water-

Subjects: D - Microeconomics > D0 - General > D02 - Institutions: Design, Formation, Operations, and ImpactD - Microeconomics > D5 - General Equilibrium and Disequilibrium > D53 - Financial MarketsG - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider TradingL - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L23 - Organization of ProductionQ - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q2 - Renewable Resources and Conservation > Q25 - Water-

Autor: Donna, Javier


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