Abstract
Institutions evolve in response to uncertainty about the implications of complex interdependencies between individuals.' Farm producers' desire to minimize the risk associated with crop production can cause contamination of groundwater supplies and pose health risks for farm and nonfarm users of groundwater. This essay develops an analytical framework to address the interdependent risks created by this nonpoint externality and evaluates the potential of alternative institutions to coordinate the actions and relations between agents in the externality setting. This analysis leads to some conjectures about the evolution of specific institutional forms under different groundwater allocation systems.
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