Depending on how measured, agriculture may consume 60% of California’s water. With drought reducing supplies and growing urban, environmental and recreational demands, pressures exist to reallocate water. This can come from market exchange based on existing property rights or from regulatory mandates. The former is likely to meet long-term reallocation objectives at lower cost than the latter. The contentious, 20-year battle to shift water from Los Angles to the Mono Basin illustrates the costs of reallocation via regulatory mandates. If water markets are to be used for reallocation today that exchange will be based on prior appropriation water rights. These rights have been criticized as historical anachronisms and inflexible, but in fact they do facilitate exchange. It is useful to understand how California, and indeed, the western US (and Canada) came to adopt prior appropriation rights. The prior appropriation doctrine (first in time, first in right) replaced common-law riparian water rights in an immense area of 1,808,584 mi2 on the western frontier within 40 years, a rare and dramatic voluntary shift in rights regimes that suggests large economic benefits. The analysis, based on Leonard and Libecap (2016), focuses on Colorado, one of the first states to implement prior appropriation and with complete water rights data from 1852 to 2013. We develop a model to demonstrate that when information about resources is costly, prior appropriation facilitates socially-valuable search, coordination, and investment by reducing uncertainty about resource conditions and the threat of new entry. We derive testable hypotheses and test our hypotheses using a novel dataset that includes the location, date, and size of water claims along with measures of infrastructure investment, irrigated acreage, crops, topography, stream flow, soil quality, precipitation, and drought. We find that prior appropriation lowered search costs for subsequent claimants. Moreover, secure property rights to water and controls on new entry doubled average infrastructure investment and raised total irrigated acreage and value of agricultural output by approximately 134% across western states, relative to a hypothetical riparian baseline. The economic returns to prior appropriation were lower in Hispanic areas of Colorado where pre-existing informal sharing norms were in place and where formal rights were not required to coordinate investment and resource management. The analysis indicates why prior appropriation rights are dominant today. Given the long-term ownership expectations associated with prior appropriation, water reallocation that is not based on them could lead to significant economic disruption and cost in achieving California’s emerging water allocation objectives.
Gary D. Libecap is Professor of Corporate Environmental Management in the Bren School of Environmental Science & Management and Professor of Economics at the University of California, Santa Barbara. He also is Research Associate at the National Bureau of Economic Research in Cambridge, MA., Research Fellow at the Hoover Institution, Stanford University, and Senior Fellow at the Property and Environment Research Center, PERC, Bozeman, Montana. He was Pitt Professor of American History and Institutions, Cambridge University, Economics Faculty and Saint Catharine's College, 2010-11. He received his PhD from the University of Pennsylvania and a BA from the University of Montana. His research focuses on the role of property rights institutions in addressing the open access losses for natural resources such as fisheries and freshwater, as well as the role of water markets in encouraging efficient use and allocation.