Irrigation Institutions in the American West

Abstract

ABSTRACT The history of irrigation organizations during the late nineteenth and early twentieth centuries in the arid and semi-arid American West reveals the important role of experimentation in determining the institutional forms that evolved. The legal framework was such that a wide variety of bottom-up organizations developed to deal with transaction cost problems. Contracting was complicated by asset specificity, potential spillovers between users, free-riding, and holdout problems. Asset specificity on the part of both farmers and irrigation infrastructure owners should have led to vertical integration with a single firm owning both the farmland and the infrastructure. However, the differing economies of scale between capturing and delivering irrigation water and farming meant that vertical integration would have resulted in costly operations. Instead of vertical integration or the separate ownership of farms and irrigation infrastructure, western farmers sought out intermediary institutions. In some cases, simple contracts among a few farmers were sufficient to divert water from streams and to carry it to crops. In other cases, a developer would form a commercial irrigation company, buy a large block of land, install irrigation infrastructure, and then sell off farms. However, the commercial irrigation company did not provide solutions to transaction cost issues; instead, it was fraught with transaction cost problems that undermined its usefulness. Mutuals, both incorporated and unincorporated, allowed farmers to contract with other farmers to own and operate irrigation facilities. Irrigation districts, a form of localized government with coercive powers, were authorized in all of the western states. These districts became another significant form of irrigation organization. I. INTRODUCTION II. THE TRANSACTION COSTS OF IRRIGATION III. COMMERCIAL IRRIGATION COMPANIES AND THE PROBLEM OF TRANSACTION COSTS IV. TRANSACTION COSTS OVERCOME--MUTUALS AND IRRIGATION DISTRICTS A. Unincorporated Mutual Associations B. Mutual Irrigation Companies 1. The Nineteenth Century Revolution in Corporate Law 2. The Institutional Form of Mutual Irrigation Companies 3. Mutual Irrigation Companies and Transaction Costs C. Irrigation Districts 1. The Formation of Irrigation Districts 2. The Financing of Irrigation Districts 3. Irrigation Districts and Water Rights 4. Irrigation Districts and Transaction Costs.. V. CONCLUSION I. INTRODUCTION Aridity is a defining characteristic of the American West, and the application of water to land is a central theme in the history and development of the seventeen coterminous western states. As late as 1875, W.B. Hazen, an army officer who served in the West, claimed that all the land between the hundredth meridian and the Sierra Nevada was uninhabitable and that 'emigration to these places known not to be arable, be emphatically discouraged.' (1) Others were more optimistic about the settlement of the West if the problem of irrigation could be solved. In 1896, the legal scholar William P. Aiken wrote: The economic future of the far west is largely dependent on a practical solution to the problem of irrigation. Millions of acres lie there sterile and lifeless, yet with all the elements of fertility locked up in the soil, and with sunshine and a climate favorable to every kind of agricultural production. The nimble jugglery of the statistician does not enable one to grasp the situation. Square acres of maps and huge columns of figures convey but a dim impression of the urgency of the problem. Only the traveler who has passed over the vast solitudes and witnessed the transformation wrought here and there by some unknown Aaron of the wilderness can appreciate the enormous forces of nature waiting for a deliverer. …