Development of Water Markets Using Experimental Economics

  • Ariel Dinar
  • Richard E. Howitt
  • S. J. Rassenti
  • Vernon L. Smith
Part of the Natural Resource Management and Policy book series (NRMP, volume 15)


The large, complex water systems throughout the world, including the Western U.S., have traditionally required a centralized authority both to solve their fundamental coordination problems and to dictate solutions to their allocation issues. These problems are often exacerbated by factors such as the public good nature of water, externalities associated with transporting and consuming water, and the economies of scale in shared production facilities. In our world of rapid technological and environmental change, these centrally-managed systems tend to move too slowly to allow a society to adapt efficiently. One of the problems with proposals for substantial institutional change is that adaptation and irreversibility make the process slow, cautious, and costly to society. In this chapter, we will discuss both the recent development of’ smart’, computer-assisted markets (xcMcCabe et al., 1991) which provide the promise of developing decentralized solutions to these complex allocation problems, and the role that experimental economics can play in evaluating proposed institutional changes to help facilitate a more rapid and smooth adoption of these changes.


Experimental Economic Spot Market Water Market Double Auction Water Trade 


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Copyright information

© Kluwer Academic Publishers 1998

Authors and Affiliations

  • Ariel Dinar
    • 1
  • Richard E. Howitt
    • 2
  • S. J. Rassenti
    • 3
  • Vernon L. Smith
    • 4
  1. 1.Rural Development Departmentthe World BankWashington, D.C.
  2. 2.Department of Agricultural EconomicsUniversity of CaliforniaDavis
  3. 3.Economics Science LaboratoryUniversity of ArizonaTucson
  4. 4.Economics Science LaboratoryUniversity of ArizonaTucson

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