The Review of Economics and Statistics 2026
Transaction Costs and the Gains from Trade in Water Markets
Abstract
Surface water in California is scarce and tightly managed, yet little is traded through a market. This paper studies transaction costs in the existing wholesale water market and estimates the benefits of reducing them. I develop an empirical framework that uses transactions among water districts to analyze welfare, decomposing prices into demand and transaction costs and simulating a market with only physical frictions. Transaction costs are large: median variable costs are 54% of the price, and fixed costs deter many districts from participating. Eliminating them produces gains of several hundred million dollars per year, or 1-3% of statewide water expenditures.
- DOI
- 10.1162/rest.a.1861
- Pages
- 1-45
- Language
- en
- Sources
- crossref