Water Markets and Drought Adaptation: Insights from Policy Interventions

Titulo: Water Markets and Drought Adaptation: Insights from Policy Interventions

 

Abstract: This paper analyzes the effects of a policy to restrict water use during droughts within the context of the Chilean water market. Exploiting the standardized precipitation index at county level and a regional index of river flows as instrumental variables that generate exogenous variation on the intensity of policy treatment of water shortage decrees. Our findings reveal a divergence in the market price of water, within areas experiencing water scarcity witnessing a smaller increase in water prices following decrees, while regions blessed with a higher supply of water saw a larger increase in prices. We also find that water shortage decrees boost investment in micro-irrigation, has a positive impact on high-value crops and a negative impact of low-value crops, shedding light on the interplay between contingent quotas on environmental factors, when regulated market forces determine water resource utilization.