Designing efficient and sustainable water reallocation in California

Team: Paul Milgrom, Barton Thompson, Billy Ferguson
Planning (Scoping)

Dam on the American River below Folsom Dam, this dam helps maintain a steady flow in the Central Valley in Northern and Central California for the various agriculture efforts and Fisheries. (*Image credit: Getty Images*)

Western states must reallocate water, the shrinking resource, to satisfy the greatest needs. California may seem poised to redistribute water because it has built one of the world’s most advanced and connected hydrological distribution networks. However, the existing legal and regulatory infrastructure creates significant barriers to water reallocation. This project established a collaborative team of policymakers, regulators, hydrologists, lawyers, and economists to co-create novel market mechanisms that respect the rights of existing users and provide a scaffolding for sustainable adaptation to the changing climate.

To promote a well-functioning market for surface water in California, the team proposed a new regulatory practice to balance the trade-off between externalities and transaction costs. A Water Incentive Auction will motivate a sufficient number of current rights holders to swap old rights for the new ones. The Water Incentive Auction adapts lessons learned from the U.S. government’s successful Broadcast Incentive Auction, a topic for which the lead PI won the 2020 Nobel Memorial Prize in Economic Sciences. The water allocation space shares many difficult market dynamics with the broadcast spectrum.

The team successfully assembled a group of cross-disciplinary experts, and various audiences received the proposal with great interest. The team has published papers and secured additional funding. Next up is to pilot this work in a suitable water district in the western U.S.