The Development of Water Rights in Colorado: An Empirical Analysis

By Penn, David A.; Zietz, Joachim | American Economist, Fall 2010 | Go to article overview

The Development of Water Rights in Colorado: An Empirical Analysis


Penn, David A., Zietz, Joachim, American Economist


I. Introduction

An important insight offered by the property rights economics literature is that institutions, or the rules of the game, affect how well markets function (Pejovich 1990). Properly functioning markets require well-defined and enforceable property rights. When property rights are poorly defined or weakly enforced, market incentives that encourage entrepreneurial activity, innovation and invention, creative activity, and hard work will diminish in effectiveness (Demsetz 1967).

Property rights do not spring up from the ground well defined and enforceable. Rather. they change over time due, in part, to changing economic circumstances (Demsetz 1967; Anderson 1982; Pejovich 1990). People not only pursue their self-interest within the rules, they also allocate resources to changing the rules of the game to their own benefit (Anderson 1982, p. 761). In fact, establishing and protecting property rights can be considered a productive activity toward which resources will be devoted.

The manner in which certain property rights emerge and change over time is the focus of this study. The origins and evolution of Western water law offer an important example of how property rights change in response to changing economic incentives. The paper focuses on the Colorado experience largely due to the fact that Colorado was one of the first states to establish a system of water rights based exclusively on the system of prior appropriation. Many of the developments in water rights in the rest of the Western United States derive in one way or another from the Colorado system.

Our study offers the first quantitative evidence that links economic incentives with water rights defining and enforcing activity. Our model suggests that water claimants will more carefully define their rights to water when either the demand for water increases or the supply of water decreases. The results also indicate that not all empirical facts easily match a theory of property rights evolution, as developed, for example, in Anderson (1982). To understand historical developments it appears useful to also incorporate the predictions of the rent seeking literature (e.g., Krueger 1974), especially as it applies to agriculture (Honma and Hayami 1986; Anderson and Hayami 1987; Gardner 1987).

The manner in which water rights evolve and adapt to increasing demand for water and frequent periods of scarcity is at least as relevant today as it was in the late 19th century. Rapidly rising demand coupled with periodic severe droughts exert great pressure on today's water allocation institutions, in the U.S. as in other countries. Competition for water has multiplied for a number of reasons including rapid urban population growth, protection of instream water rights, competition for water among states, and the recognition of Native American water rights.

The remainder of the paper is organized as follows. The next section provides a brief account of water rights development in Colorado, offering qualitative evidence of how the rules of the game evolve with changing economic circumstances. This is followed by an outline of a simple model for water rights development. The data are presented next, followed with a presentation of empirical model estimates. The paper ends with a brief summary and some conclusions.

II. Historical and Legal Background

Agricultural development, irrigation, and the evolution of water rights law were inseparably linked during the late 19th and early 20th centuries in Colorado. The next section discusses the historical development of irrigation in Colorado, followed with an analysis of the formation of legal precedents.

1. Farming development and irrigation

Farmers migrating to Colorado found a large percentage of sunny days and low humidity, both very favorable for crop production given adequate moisture. But with annual precipitation of just 12 to 15 inches in the plains east of the mountains, irrigation was employed where water was available (Census 1920). …

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