Emerging markets in water: A comparative institutional analysis of the Central Valley and Colorado-Big Thompson Projects

Water trading is a potential means to improve the productivity of developed water supplies and reconcile competing uses. Economic theory suggests that markets evolve in response to changes in supply and demand. This predictio n is at odds with observed disparities in the pace of market development in regions facing similar pressures on scarce water resources. A dramatic exa mple of this disparity is found in the regions served by the California Cen tral Valley Project and the Colorado-Big Thompson Project. This article arg ues that the differences in market activity in the two areas can be explain ed largely by the underlying water allocation institutions. The article ide ntifies key institutional features that affect the transaction costs of wat er trading and examines the roots of the institutional differences. The ins titutions governing market transactions today are largely a function of pre -existing property rights and political battles to build consensus and obta in federal financing for the projects. The article highlights the path-depe ndent nature of water allocation institutions and trading, but also suggest s that complex inter-regional markets could still develop in California giv en ever-increasing competition for scarce water resources and advances in i nformation technology that lower market transaction costs.