When directives rather than contracts determine rights to water flows, agents will substitute away from securing water rights by contract toward securing them through political directives. Especially when they are legitimated by court rulings, such directives alter the rules that govern social...

Price theory analysis teaches us that, as the cost of using markets rises (ie transaction costs), we will expect to see either higher prices in the market, lower activity, or some combination of the two. We have a natural experiment to test this hypothesis in water exchange markets in Colorado....

When directives rather than contracts determine rights to water flows, agents will substitute away from securing water rights by contract toward securing them through political directives. When those directives are legitimated by court rulings, they alter the rules that govern social...