The Effects of Policy Uncertainty on Irrigation and Groundwater Extraction

Irrigated agriculture on the Southern High Plains of Texas relies heavily on water extracted from the Ogallala Aquifer, which is functionally non-renewable. Concerns about depletion of the aquifer have led to the implementation of policies designed to slow water extraction and increase the usable life of the resource. Policies have not been uniform across the aquifer, however, leaving some farmers in regions where no effective groundwater extraction policy exists yet, but are only a short distance away from regions where farmers do face regulatory limits on extraction. This paper investigates the effects of policy uncertainty on the extraction of groundwater in those areas where farmers must make irrigation decisions without knowing whether they will be restricted in their irrigation decisions in the future. We build a production model of the major crops in 6 counties in Texas, and use the quantity of corn (an irrigation-intensive crop) produced as a proxy for irrigation use. We find that corn acreage has increased significantly in years in which a policy was in place, but was officially unenforced in 5 of the 6 counties. After controlling for price and climate effects, we conclude that there is strong evidence that policy uncertainty increases groundwater extraction.