Economic Organization and the Lease-Ownership Decision in Water

Abstract

This paper analyzes the lease-own decision for water using data on water transactions. Water is transferred through short-term and long-term leases as well as permanent ownership contracts. Water is a unique asset in that its supply is highly variable and its transfer and use affect third parties. We apply an ordered probit analysis to investigate the empirical determinants of contract type. We confirm that long-term and permanent contracts are more likely when investments in specific assets are required for conveyance. We also find that longer term arrangements are common when buyers with uncertain water supplies are purchasing from sellers with more certain rights. We do not find robust evidence supporting the hypothesis that short-term agreements are more likely when the costs of a transfer to third parties are potentially high.