Abstract
Water markets have been used by Australian irrigators as a way to reduce risk and uncertainty in times of low water allocations and rainfall. However, little is known about how irrigators’ bidding trading behavior in water markets compares to other markets, nor is it known what role uncertainty and a lack of water in a variable and changing climate plays in influencing behavior. This paper studies irrigator behavior in Victorian water markets over a decade (a time period that included a severe drought). In particular, it studies the evidence for price clustering (when water bids/offers end mostly around particular numbers), a common phenomenon present in other established markets. We found that clustering in bid/offer prices in Victorian water allocation markets was influenced by uncertainty and strategic behavior. Water traders evaluate the costs and benefits of clustering and act according to their risk aversion levels. Water market buyer clustering behavior was mostly explained by increased market uncertainty (in particular, hotter and drier conditions), while seller-clustering behavior is mostly explained by strategic behavioral factors which evaluate the costs and benefits of clustering.
Highlights
Water scarcity has emerged in many semi-arid regions of the world
Having observed substantial price clustering in the water allocation market, especially on the sell side, we investigate the extent to which price clustering is driven by uncertainty and/or strategic behavior and if buyers and sellers’ price-clustering behavior are influenced in the same way
This paper has provided evidence to show there are a range of influences impacting buyer and sellers’ water allocation market behavior in the Greater Goulburn trading zone in Victoria
Summary
Water scarcity has emerged in many semi-arid regions of the world. This requires the development of mechanisms to efficiently reallocate available resources between competing extractive as well as in-stream uses. Water markets have been promoted as an efficient way of facilitating this process in a number of jurisdictions, such as Australia, USA and Chile [1,2,3] and more recently in Canada [4] and. Demand for, and participation in, water markets is likely to increase. Adoption of water market trading (where available) will represent one potential adaptation strategy for many irrigators in the face of climate change. Modeling by Adamson, Mallawaarachchi and Quiggin [6]
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