University of California Research Initiatives

Groundwater is a prime example of a common-pool resource subject to over-extraction and rent dissipation under open access. To avoid this, users can assign groundwater rights: a cap is set on the volume of groundwater that can be pumped annually, and rights are allocated among users. Although this process restricts pumping, it also improves long-term resource availability, grants a fungible asset that can be traded, and reduces uncertainty for urban developers. We investigate the effect on land values by exploiting a plausibly exogenous discontinuity in the definition of rights in the Mojave groundwater basin in California. Because both the long-term stream of agricultural rents and the value of tradable permits are capitalized into land value, spatial regression discontinuity designs identify the difference between the value of interior parcels with water rights and those of free riders on the exterior, who can drain from the regulated area with no restrictions. We find that the value of rights outweighs gains realized by free riders and that property rights increase land value by half. The large gains estimated here support the idea that the allocation of rights may be instrumental in convincing otherwise recalcitrant users to accept restrictions.