Rent Appropriation and Groundwater Property-Right Systems in the American West: A Strategic and Laboratory Analysis

Abstract

Subsequently Published as: "Ground Water Law in the American West: Economic Modeling and Analysis," Designing Institutions for Environmental and Resource Management, edited by Edna Loehman and Marc Kilgour, Edward Elgar Ltd.,1998.

"This paper considers the issue of rent appropriation from a groundwater common property resource under various property-rights systems employed by states in the American West. A benchmark model is constructed with a fixed stock of groundwater and fixed exhaustion time, with a specification based on data from the Ogallala Aquifer. Solving this model for its efficient equilibrium and a subgame perfect equilibrium provides a calibration for comparing rent appropriation from different property systems. The subgame perfect equilibrium accords closely to Texas state law. Among the systems compared are the prior appropriation doctrine (used by most western states), the correlative rights doctrine (adopted in Nebraska, Oklahoma, and some groundwater basins in California), the Arizona Groundwater Management Act of 1980, and the Smith Rule (a rule proposed by Vernon Smith in 1977 for use in Arizona). Each system varies in the nature of aquifer entry rules, individual withdrawal permits, and minimum time-to-exhaustion rules. The paper: (1) models these features as parametric traits of property systems, (2) analyzes individual strategic behavior within this framework, and (3) reports results from laboratory experiments that apply the framework. As states consider groundwater policy reform, the analysis of actual property-rights systems and parallel laboratory results can inform the policy process."