Law and the New Institutional Economics: Linking Insights and Research Gary D. Libecap University of...

Law and the New Institutional Economics: Linking Insights and Research

Gary D. LibecapUniversity of California, Santa BarbaraNational Bureau of Economic Research

Hoover Institution, Stanford

Mapping the Frontiers of New Institutional EconomicsJune 11, 2008, University of Colorado School of Law

The New Institutional Economics

Focuses on the interaction between formal and informal institutions, including the law, and economic behavior.

Institutions to reduce uncertainty, sources of information, reduce the transaction costs of exchange. Coordinate collective action.

Promote trade, production, investment. Used for redistribution. Efforts to mold institutions.

The Challenge: Operationalizing the NIE

Institutions are inherently difficult to measure. Clarity in definitions and measurement. Clear methodology and hypotheses. Data (quantitative and qualitative) for testing. Generalizations from the specific to the

general.

Water Law, Transaction Costs, and Water Markets

California case study. Interaction between water law and observed water exchanges, 1987-2005.

Problem: Need to re-allocate water from historical uses in agriculture to urban and environmental uses. Large differences in relative values.

Water is not land. Interdependencies, bounding, and measurement issues. Regulatory role. Resistance to markets.

Precision in which water rights are defined and the nature of the regulatory review process may affect water exchanges.

Water Institutions and Markets

Courts, legislation, administrative rulings (State Water Resources Control Board): water rights and transfers. Beneficial use, conservation, fallowing Standing in regulation Parties involved—rights owners, irrigation

districts, Bureau of Reclamation, Department of Water Resources, Federal Central Valley Project

Endangered species, other third parties. “No injury” rule.

Water Rights and Markets

The Data Patterns of transactions Types of contracts used

Water Transactions

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 20060

2

4

6

8

10

12x 10

5

Year

Volu

me o

f T

ransfe

rs (

acre

feet)

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 20060

2

4

6

8

10

12x 10

5

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 20060

10

20

30

40

50

60Total Transfers in California 1987-2005: Volume and Number

Num

ber

of

Tra

nsfe

rs

Volume of Transfers

Number of Transfers

Water TransactionsContract Type

0

5

10

15

20

25

30

35

40

Year

Nu

mb

er

Sales

Short-Term Leases

Long-Term Leases

Water Transactions

Number of Trades by Major Category

0

5

10

15

20

25

30

Year

Nu

mb

er Ag to Ag

Ag to Envir

Ag to Urban

Water Transactions

Quantities Traded by Category

0

100,000

200,000

300,000

400,000

500,000

600,000

Year

Acre

Feet

Ag to Ag

Ag to Envir

Ag to Urban

NIE Analysis

Measurement Approach Conclusions

NIE Analysis: Data on Legal Change in California

Factors that Strengthened Property Rights and Lowered the Transaction Costs of Trading Factor Number*

--Does the law make the water right more definite or precise? 1

– Does the law specifically define what uses qualify as beneficial uses? 2

– Does the law allow for the sale of the land without the water right or the water right without the land? 3

– Does the law allow someone to profit from the sale, transfer, or exchange of his water right to another? 4

– Does the law allow someone to transfer ownership of his water right? 5

– Does the law allow someone to lease his water right to someone else? 6

– Does the law allow temporary transfer of water rights on an emergency basis, in times of need? 7

– Does the law allow someone to exchange his water right? 8

– Does the law add a mechanism for enforcing water rights? 9

– Does the law require or encourage water conservation? 10

– Does the law encourage water conservation and then allow the owner of the right to sell or transfer some or all of that conserved water?

11

– Does the law provide for water banking mechanisms? 12

– Does the law provide an expedited process for short-term transfers or transfer of water rights during times of great need, like droughts?

13

– Does the law allow the use of canals, reservoirs, water support facilities, or streambeds to transport water as part of a water transfer?

14


Factors that Weaken Property Rights and Raise the Transaction Costs of Trading

--Does the law authorize water districts, irrigation districts, or other member institutions to regulate use and transfer of water by their members?

15

– Does the law limit water use based on environmental concerns or restrictions? 16

– Does the law limit the transfer of water rights to protect the rights of other water users? 17

– Does the law restrict the transfer of water rights to protect the environment? 18

– Does the law require a third party to be compensated for damage to his water right or when he sells or transfers his water right?

19

– Does the law provide for or require notice of proposed water transfers? 20

– Are third parties allowed to protest water transfers, and what is the mechanism for those protests? 21


Analysis of each statute, court ruling, and agency opinion in California 1980-2005 Subjective opinion of law students if there was a

“significant” change in the law. “1” coded and then remained, reflecting a permanent

change in the institutional environment. “1” coded if any category had another significant

change.


Comparison of Legal Changes that Promote and Restrict Water Transfers over Time

0

24

6

8

1012

14

16

1987 1990 1993 1996 1999 2002 2005

Nu

mb

er o

f C

han

ges

Promote Restrict


Changes in Legal Variables that Promote Transfers

02468

101214161820

1 2 3 4 5 6 7 8 9 10 11 12 13 14

Factor Number (Table 2)

Nu

mb

er o

f C

han

ges


Changes in Legal Variables that Limit Trading

0

1

2

3

4

5

6

7

8

9

10

15 16 17 18 19 20 21

Factor Number (Table 2)

Nu

mb

er o

f C

han

ges

NIE Statistical Analysis

Number and Quantity of Transactions = f(Year Variables, Controls: precipitation, population, canals, state GDP, ag share, other ag data-land in farms, harvested, etc- per capita income)


Determinants of the Number of Water Transfers

Variable

Estimate

StandardError

Chi-Square

p-value

Intercept 1.5156 0.4337 12.21 0.0005

Lagged Population Change 0.1821 0.0389 21.94 0.0001

Precipitation -0.0277 0.0104 7.16 0.0075

Dummy 1989 0.8372 0.2693 9.66 0.0019

Dummy 1991 0.8436 0.1822 21.44 0.0001

Dummy 2000 -0.2911 0.1303 4.99 0.0254

Dummy 2003 0.2335 0.1598 2.14 0.1438


Determinants of the Volume of Water Transferred

Variable

Estimate

StandardError

Chi-Square

p-value

Intercept -1.6270 4.4744 -0.36 0.7225

Lagged Population Change 0.8889 0.4625 1.92 0.0787

Precipitation -0.1698 0.1069 -1.59 0.1381

Dummy 1989 4.8988 2.1335 2.3 0.0405

Dummy 1991 3.4696 2.1492 1.61 0.1324

Dummy 2000 -1.0059 1.4880 -0.68 0.5119

Dummy 2003 3.4214 1.7602 1.94 0.0757

NIE and Legal Analysis

Legal institutions can impact the transactions costs of exchange.

Interaction between water law and water market transactions. Drought Population pressure Legal change has an observed impact on the number and

quantity of water exchanged. Legal structure means that most activity is via one-year

leases Example of the application of the NIE to study of the

interaction between law and economic behavior.

Law and the New Institutional Economics: Linking Insights and Research Gary D. Libecap University of...

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