Water Markets and Coordination Failures: a Case Study from Chile

In this study, an operating water market inside an agricultural area in Northern Chile was analyzed. The author collected information from farmers who used this very special market during an extreme drought that lasted three years, and estimated a model of water transactions using real data in order to evaluate how much does this peculiar market worked for them in terms of economic efficiency. Both static and dynamic issues are tackled in a more theoretical modeling to show that the increasing presence of permanent crops (mainly grapes) and coordination failures in investments in this area would make the water market less responsive and effective (in efficiency terms) in the long term. The main conclusion is not to avoid the operation of the water market but to design better rules and regulations for improving its performance.