Water Rights for Variable Supplies Creation_Date: 2004-02 Revision_Date: 2005-05

The relative merits of different property right systems to allocate water among different extractive uses where variability of supply is important are evaluated. Three systems of property rights are considered. In the first, variable supply is dealt with through the use of water rights defined as shares of the total quantity available. In the second, there are two types of water rights, one for water with a high security of supply and the other a low-security right for the residual supply. The third is a system of state-contingent claims. With zero transaction costs, all systems are efficient. In the realistic situation where transaction costs matter, the state-contingent claims system is globally optimal, and the system with high-security and low-security rights is preferable to the system with share allocations.