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How Transaction Costs Obstruct Collective Action: Evidence from California's Groundwater

Andrew B. Ayres, Eric C. Edwards, Gary D. Libecap

NBER Working Paper No. 23382
Issued in May 2017
NBER Program(s):The Program on the Development of the American Economy, The Environment and Energy Program

Collective action to remedy the losses of open access to common-pool resources often is late and incomplete, extending rent dissipation. Examples include persistent over-exploitation of oil fields and ocean fisheries, despite general agreement that production constraints are needed. Transaction costs encountered in assigning property rights are an explanation, but analysis of their role is limited by a lack of systematic data. We examine governance institutions in California’s 445 groundwater basins using a new dataset to identify factors that influence the adoption of extraction controls. In 309 basins, institutions allow unconstrained pumping, while an additional 105 basins have weak management plans. Twenty of these basins are severely overdrafted. Meanwhile, users in 31 basins have defined groundwater property rights, the most complete solution. We document the critical role of transaction costs in explaining this variation in responses. This research adds to the literatures on open access, transaction costs, bargaining, and property rights

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Document Object Identifier (DOI): 10.3386/w23382

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