Droughts, Deluges, and (River) Diversions: Valuing Market-Based Water Reallocation
Will Rafey
Climate change will continue to amplify water scarcity and variability. Rising temperatures directly alter the hydrological cycle, intensifying drought and deluges. Climate models predict substantial declines in water resources for irrigation and more uncertainty over future river inflows (1).
These unprecedented environmental changes renew longstanding questions about the efficiency of water allocation. Water regulators typically allocate water through non-market mechanisms, such as quotas based on landholdings, political influence, or historical priority. Economists have amassed considerable evidence for water misallocation under these existing water rights regimes (2). However, such findings have rarely translated into policy, where market-based instruments remain highly controversial.
While water markets can improve efficiency under ideal conditions, the practical realities of a river system make it challenging to obtain evidence of the prospective gains from trade. As a long literature seeking to explain the rarity of water markets has emphasized, trading opportunities in an actual river network may be costly, uncertain, or manipulable. River flow constraints, noncompetitive conduct, and liquidity constraints can dampen or reverse prospective trading gains. Moreover, evidence from several nascent water markets has led some economists to conclude that “the reality of water markets falls short of their potential (3).”
In his paper, “Droughts, deluges, and (river) diversions: Valuing market-based water reallocation,” Professor Will Rafey contributes to this debate over water markets with an approach that accounts for evolving river flow constraints and other market imperfections. His paper relies on new data on water rights, trades, and agricultural production collected from the largest water market in human history, located in southeastern Australia. The empirical framework values the Australian water market in two steps. First, the paper estimates a model of irrigated agricultural production to recover the distribution of water values. Second, the paper compares welfare under observed pre- and post-trade water allocations.
The paper finds that water trading increased output by 4-6% from 2007-2015, which makes shutting down the market for water equivalent to experiencing the median water shortfall from 1°C of global warming. In addition, the gains from trade increased substantially during drought. This result implies that water markets can be important for adapting to climatic variation from long-run shocks like climate change and cyclical shocks such as droughts.
1. On climate change and the hydrological cycle, see Oki and Kanae (2006).
On droughts and deluges, see Prudhomme et al. (2014) and Sobel et al. (2016), respectively.
On irrigation, Elliott et al. (2014) document water scarcity and Schewe et al. (2014) analyze water variability.
2. Libecap (2011).
3. Regnacq et al. (2016), p. 1274.
Paul Clyde Profiled by The Center for Global Health Equity at the University of Michigan
The Center for Global Health Equity at the University of Michigan recently published a profile on Paul Clyde, a graduate of the UCLA’s Economics program (Ph.D ’90). Professor Clyde is currently the Tom Lantos Professor of Business Administration, President of the William Davidson Institute, and a member with the Center for Global Health Equity at the University of Michigan. The profile highlights Professor Clyde’s role in advancing economic development and health care provision in low- and middle-income countries.
The profile can be found here.
More stories from the Equity Connections Blog can be found here.
David Baqaee Invited to Contribute an Article by the Society for Economic Dynamics
UCLA’s Economics Professor David Baqaee was recently invited by the Society for Economic Dynamics to write an article about his research agenda. The article, Macroeconomics as Explicitly Aggregated Microeconomics, describes Professor Baqaee’s focus on the role of production networks in the transmission of economic shocks.
More about SED can be found here.
Newly Elected Economic Theory Fellows 2022: Simon Board and Andrew Atkeson
The Department of Economics congratulates Andrew Atkeson and Simon Board on being named Economic Theory Fellows by the Society for the Advancement of Economic Theory (SAET). SAET’s purpose is to advance knowledge in theoretical economics and to facilitate communication among researchers in economics, mathematics, game theory, or any other field which is potentially useful to economic theory. Economic Theory Fellows are selected for their scientific excellence, originality, and leadership, high ethical standards, and scholarly and creative achievement. The research contributions of fellows may exist in many areas of theoretical economics, including pure and applied research, and government service. The primary qualification for fellowship is to have substantially advanced economic theory work.
Professor Atkeson is the Stanley M. Zimmerman Professor of Economics and Finance. His research spans a variety of topics in macroeconomics, including the sustainability of international debt, the design of monetary policy and the measurement of the firm solvency.
Professor Board is a microeconomic theorist who studies information economics, with applications to auction design, industrial organization, and labor economics. His recent research includes the spread of information on social networks, the design of dynamic pricing algorithms, and the role of reputation in incentivizing investment.
Restorative Justice and Recidivism: Evidence from the Make-it-Right Program
Yotam Shem-Tov
The United States criminal justice policy has historically relied on sanctions to enforce compliance. Sanctions became increasingly punitive beginning in the late 1970s, leading to large increases in the correctional populations. Recent years have seen an effort to dial back the severity of punishments and use alternatives to criminal prosecution.
Restorative justice conferencing (RJC) is one such alternative that emphasizes accountability through repairing harm rather than imposing sanctions. While restorative justice programming can take many forms, in criminal justice settings, it usually involves direct conferencing between the person responsible for the harm and the victim.
In “Can Restorative Justice Conferencing Reduce Recidivism? Evidence from the Make-it-Right Program,” Professor Yotam Shem-Tov and his co-authors Steven Raphael and Alissa Skog present new evidence on the effectiveness of RJC in combating recidivism by evaluating the Make-it-Right program (MIR).
MIR is a restorative justice conferencing program that serves teens between the ages of 13 to 17 who would have otherwise been charged with a felony offense of medium severity (e.g., burglary, assault). Following extensive preparation, participating youth meet with the people they have harmed, accept responsibility for the impact of their actions and come to an agreement for how the youth can repair to the greatest extent possible the harm they caused. If the youth follow through with the repair actions outlined in the agreement, charges against them are never filed; if they do not, they face felony prosecution. In this study, eligible youth were randomly assigned to participate in MIR or to a control group in which they standard faced criminal prosecution.
The authors find that assignment to MIR has large recidivism-reducing effects. Youth assigned to MIR are less likely to be rearrested within six months by 19 percentage points, a 44 percent reduction relative to the control group. Moreover, the reductions in rearrests persist even four years after randomization. Among those assigned to MIR, 81 percent enrolled in the program, and 53 percent completed it. Accounting for imperfect take-up of treatment magnifies the results. The effect of enrolling or completing MIR is roughly 1.3 and 1.9 times larger than effects based on the naïve comparison of youth assigned to MIR relative to the control group.
The results provide strong evidence that restorative justice conferencing can reduce recidivism among youth charged with relatively serious offenses and can be an effective alternative to traditional prosecution.
The Evolution of Retirement
UCLA Economics Professor Dora Costa’s book, The Evolution of Retirement was recently featured in The Atlantic. In the article, The Future of Work Is a 60-Year Career, the author references Costa’s book in relation to the current discussion regarding increasing the age at which people should retire.
UCLA Econ Places in The Fed Challenge
This year UCLA participated in the Federal Reserve Challenge for the first time. The Fed Challenge is a nationwide competition among colleges and universities in which student-teams formulate a monetary policy recommendation and present it to judges from the Fed. The UCLA team finished first in its division and in the top 6 nationwide. The team was composed of Chris Surro (coach), Colleen Burns, David Hu, Jaden Locke, Richard Covrig and Rebecca De La O (presenters), Anna Verghese, Arif Abd Aziz, Jia Chen, Joleen Chiu, Matthew Craig, Michael Keily, Phoebe Chiu, Rawi Baransy, and Shane Hixon (research support). The press release from the Federal Reserve is available here: https://www.federalreserve.gov/newsevents/pressreleases/other20211119a.htm
Market power in rural labor markets
Michael Rubens
There are increasing worries about rising `market power’ of large corporations, both in the U.S.A. and across the globe. Powerful firms can reduce competition on many fronts. The usual worry is that insufficient competition harms consumers by pushing up prices and/or lowering product quality. A lack of competition can, however, also hurt workers if firms use their dominant position to lower prices paid for their inputs, such as labor or raw materials. When designing competition policy to ensure an even playing field, it is crucial to know where exactly firms exert their market power.
In his paper `Market Structure, Oligopsony Power, and Productivity’, Professor Michael Rubens investigates this question in the context of the Chinese tobacco industry. Industries that rely on agricultural products are generally vulnerable to the exertion of buyer power, because they often feature a limited set of final goods producers or processers who buy inputs from a large number of farmers. The main questions addressed are (i) whether Chinese cigarette firms mainly exert market power on cigarette or tobacco leaf markets, and (ii) how these different types of market power are affected by mergers and acquisitions.
- Why Chinese tobacco? When simply comparing input and product prices between merged and non-merged firms before and after mergers, there is a worry that there are unobserved drivers of both mergers and prices: mergers are the result of careful consideration by the involved parties. The Chinese tobacco industry offers a unique setting that circumvents this issue, because of a 2003 reform that consolidated the industry along strictly enforced size thresholds. In addition, local tobacco leaf markets in rural China are isolated due to legal restrictions on cross-county tobacco leaf trade. This allows to divide local tobacco markets into markets that are treated and untreated by the consolidation of the industry.
- What do I find? Combining this local market variation with a structural model of pricing and production, and using detailed firm-level data on all Chinese cigarette manufacturers between 1999 and 2006, I find that manufacturers do not have any pricing power on the cigarette market, but do have large market power when setting prices of tobacco leaf. I find that tobacco farmers receive merely a quarter of the price they would receive in a competitive market. Moreover, the industry reform lowered this share received by the farmers by another 30% on average.
- Why does this matter? Urban-rural income inequality is a large problem in China and in many other countries. The evidence in the paper shows that industry consolidation policies that are meant to increase firm productivity growth can lead to distortions on input markets, and hence to higher regional inequality by worsening the bargaining positions of farmers.
Peter Moglia
Peter Moglia
On a brisk fall day in 1985, Peter Moglia entered UCLA’s campus as a nervous yet excited freshman, much like the rest of us. He was basking in his recent acceptance on appeal, prompting him to turn down two prestigious military academies, including West Point. However, Peter was soon to face some existential obstacles during his first quarter, as he initially came in prepared to follow a science path.
“My first quarter was a bit of a disaster,” he chuckled as he described his schedule consisting of Chem 11A, Math 31A, and Psych 10. He candidly shares his struggle with adjusting to the new college lifestyle, especially as UCLA did not leave much room to “wing it”. This is an experience that almost every freshman in college endures: the journey of growing independence, time management skills, and responsibility. It was comforting to hear this from someone as successful as Peter, as it is so easy to sink into the existential spiral of not being cut out for college life, or life out in the real world, for that matter. But he graciously reminds us that despite being placed on academic probation in his first year and struggling to sustain a healthy GPA, “there is a happy ending to all of this,”– and he was right.
Another year came around, and he decided to take Econ 1 as one of his “get-it-over-with” general education courses, but it turns out that it was much more than that. Peter performed well in that class, launching his transition into his new academic path of Economics.
“I remember I was learning about indifference curves and inelastic/elastic demand, and I started to see all of that in real life,” he said as he discussed his side job of working with computers. At the time, he did not think that a job selling computers would be as valuable as it was. But gradually, Peter began to strengthen these connections between his academia and his work, enhancing his understanding of both sides and developing his professional skills. His ability to continue making these types of connections eventually assisted in curating his well-rounded skill set that led him to his prolific career in real estate.
While reflecting on his professional journey, he emphasized the importance of real life experience alongside academic instruction. Even though it may not have initially been a prestigious occupation, the computer position he worked was just the experience and skillset he needed to land his first job in real estate, where he worked with converting real estate developers from mainframe-based accounting systems to personal-computer based systems. From there, he worked his way up the ladder to new positions, which included work like examining and underwriting loans before eventually going on to serve as the co-CEO and CIO for his current real estate company Alexandria. He was able to witness the growth of Alexandria, as he was one of the first fifteen people on the team. Over the course of 23 years, he saw this small, private startup transform into an incredibly profitable public company with a market cap of around $30.2 billion.
“I didn’t get to where I am because of what I learned through books, but from how I learned how to learn at UCLA,” Peter wisely noted. He emphasized the importance of going beyond typing away at a computer and going through the daily motions of getting tasks done, and instead learning how to prioritize one’s time, how to make connections, and simply, how to communicate effectively. “[Communicating well] is every bit as important as the knowledge you are getting in the classroom,” he said. He recommends getting a job that involves high levels of interaction with people, such as working at a restaurant. He even mentions how he reminds his own kids– who are current college students– to get out in the world and talk to people. In our technology and social media ridden society, this is a point that is humbling and essential for college students everywhere.
To drive this point home, Peter left us with the important reminder that “it is your grades and scores that get you in the door, but it is how you communicate that will get you the job”. Through his trials and tribulations at UCLA, he was surely able to prove that point.
