Teresa Makar

June 8, 2015
Contracting for water rights:
Utilizing Libecaps framework to investigate the California drought
2015 marks Californias fourth year of drought, leading Governor Jerry Brown to issue
an executive order in April directing Californians to reduce their urban water use by 25%
(French, 2015). Brown lawns replace lush green yards, dirty cars are left unwashed, (Yoeli et. al,
2015) and droughtshaming is utilized to publicly humiliate those who waste water and pressure
neighbors to conserve (Sanders, 2015). Although droughts are nothing new to California, the
past four years have been particularly dry and difficult. At the end of 2014, 41% of California
was experiencing the most severe kind of drought (exceptional drought) and nearly the entire
state was experiencing severe drought conditions or worse (French, 2015).
Low rainfall and high temperatures have contributed to Californias current drought.
Californias three main water sources are snowpack, reservoir water, and underground aquifers,
and all three have been suffering during the past four years. Low rainfall means less snowfall,
and high evaporation contributes to low snowpack. 2015 marked a record-low year for
snowpacksnowpack was only about 1/20 its average level. Low rainfall and high evaporation
means that reservoirs and aquifers have been drained faster than they can be replenished by rain.
The result is a steady decline in aquifer and reservoir levels. At the end of 2014, California
reservoirs had water levels that were on average only 41% of their capacity (French, 2015).
The ongoing drought has led many farmers, who, depending on the seniority of their
water rights, may receive little to no surface water when there is too little to go around, to drill
for water underneath their property. Descriptions of farmers racing with one another to drill for
precious groundwater evoke Libecaps (1989) portrayal of competitive oil drilling in the

Midwest. Similar to oil, when ground water is drilled and pulled to the surface, it is drawn from
every direction, making surface-level property boundaries meaningless (Richtel, 2015). Joining
the race for ground water, one farmer in the Central Valley region spent over $1 million in
purchasing rigs and hiring contractors to dig new wells in order to water his 4,000 acres of crops.
The consequences of pumping billions of gallons of water from the ground in the past four years
have already been realized, as the drilling has decreased water levels by 50 feet in some regions
and has caused land to sink as much as a foot a year (Gillis and Richtel, 2015). This leads to
higher irrigation costs in areas most affected by land erosion, as water must now be forced to
flow uphill (Richtel, 2015).
The current level of groundwater drilling is unsustainable, not only because it damages
the environment and infrastructure, but because California does not have enough water to
support the current rate of extraction. It is simply not possible for California to keep using so
much water in the long haul. Although drilling for groundwater allowed farmers to avoid
fallowing more than 5% of total farmland in 2014 and has prevented produce prices from rising,
many Californians are angry that, instead of conserving water, the agricultural industry is
draining the state both of its surface water and ground water (Gillis and Richter, 2015).
However, there are few laws in California that regulate groundwater drilling. As Chase Hurley,
manager of the San Luis Canal Company argues, Based on current California law, you can dig
as many holes as you want (Richter, 2015). Yet, experts say the states water crisis will not be
solved without a major contribution from farmers, and California urban residents seem to be of
the same mindset (Gillis and Richter).
Californias severe drought has led city dwellers to demand that the farming sector
reduce its water use, if not voluntarily, then by force of law. The urban sector represents about

10% of the states water use, while the agricultural sector uses about 40%---the other 50% is
used to preserve river deltas, manage scenic areas, and for other environmental uses. However,
the farming sector contributes to 80% of the states human water use (Mount, Freeman, and
Lund, n.d). Having been told by Governor Brown to reduce their water use by 25%, urbanites
want the agricultural industry to share in the states conservation efforts. A 25% reduction in
urban use comes out to about 1.3 million acre-feet, or 42 billion gallons, of water. If Californias
water reduction were evenly split (by volume) between the agricultural and urban sectors, the
agricultural sector would only have to reduce water use by 1.5% to meet its goal (California
Water Alliance, 2015). Farmers, as expected, are not in favor of interferences with their water
use rights. They are quick to point out that the agricultural sector provides valuable produce,
meat, dairy, and grains to the entire nation and has already agreed to make difficult cuts in
certain regions (Medina, 2015).
In his book Contracting for Property Rights, Gary Libecap identifies five important
factors that influence the speed and ease of assigning or modifying property rights among
bargaining parties. I utilize Libecaps framework to examine the current distribution of water
use rights between the urban and agricultural sectors and the proposed distribution (sharing water
conservation equally, by volume of water conserved). I ultimately conclude that contracting for
water rights in California is not a quick or easy process, because the bargaining parties are fairly
heterogeneous, the aggregate social gains from a reallocation of water are small, and there is
potential for large information asymmetries.
California water as a hybrid resource
Libecap focuses largely on contracting rights to common pool resources (CPRs), such as
fisheries and oil, because the failure to establish secure property rights for CPRs can lead to large

aggregate losses. California water is a complicated resource to analyze, because it does not
neatly fit into the definition of any of the four classic types of goods: public, private, toll, or
common pool. By definition, a common pool resource is rival (subtractable), but nonexcludable. Californias surface water is owned by the state, which grants use rights to
individuals and awards allocations to water districts (Brewer et al. 2008). Dams, aqueducts,
irrigation canals, and other infrastructure controls who has access to water and regular water
reporting ensures that individuals are not exceeding their water allocation. We can therefore
consider surface water a private good.
Ground water rights, however, are not well-regulated, as territorial boundaries above
ground often do not coincide with aquifer locations below ground, and digging a well on ones
own property could very well drain water from the land beneath a neighbor who lives several
miles away. This incentivizes the race to install wells and rigs to pull ground water to the
surface. As pumping increases, the water level in subterranean basins falls, and it becomes more
costly to draw water out from progressively deeper in the ground. It is also difficult to accurately
estimate the total volume of water in the basin or the volume of water left. People have the
incentive to pump early and pump large quantities of water in order to avoid high costs of
extracting water lateror to avoid losing out on all water if the aquifers are completely drained.
(Ostrom, 1990).
California water is a hybrid resource: partly private good and partly common pool
resource. Although Libecaps analytical framework largely focuses on common pool resources,
this framework can still be applied to this hybrid resource, as the same themes (number and
heterogeneity of bargaining parties, etc.) are still relevant.

1/2. The number and heterogeneity of bargaining parties.

There are two major parties involved in contracting for water rights: the urban sector and
the agricultural sector1, both of which are fairly heterogeneous. The agricultural sector employs
2% of Californias workers and contributes 5% of the states gross product (Egan, 2015). With a
total state population of 38 million, 2% amounts to more than 760,000 people (Nagourney,
Healy, and Schwartz, 2015). These .7 million people are divided along lines of language,
nationality, educational level, income, and citizenship status. According to the 2008
Agricultural Employment report published by Californias Employment Development
Department (EDD), 68% of the agricultural labor force identifies as Hispanic and 64% identify
Mexico as their country of origin. Half (49%) of the agricultural labor force speaks only
Spanish. 25% of agricultural workers have attended at least some college, but only 11% have
graduated with a bachelors degree or higher. Less than half of agricultural workers are U.S.
citizens. The division between citizens and non-citizens is quite stark: of the agricultural
workers who are native-born American citizens, 59% attended a least some college and 28%
achieved a bachelors degree or higher. In contrast, among the predominantly Mexican, Spanishspeaking non-citizens, 85% have not even completed high school. In the agricultural industry as
a whole, 61% of workers earn $10 or less an hour. Of the less than 50% of agricultural workers
who are U.S. citizens, only 25% report annual family incomes of $100,000 or more.
The agricultural sector will likely find it difficult to form a unified bargaining front when
members face internal division along cultural or class lines. Since less than half of agricultural
workers identify as American, some members may privilege an understanding of water use rights
(or property rights in general) that differs from prominent American interpretations. In addition,

Libecap notes 3 categories of interest groups who may be involved in contracting for property rights: private
claimants, politicians, and bureaucrats. Due to the scope of this paper, I will only focus on private claimants.

educational, income, or language disparities between members of the agricultural sector may
drive a wedge in communications or prevent solidarity around a common cause.
The urban sector is also fairly heterogeneous. It is safe to assume that most urban
residents would prefer a water use arrangement that would allow them to consume more water
than they currently allowed under Gov. Browns 25% water reduction mandate. However, not
every city has had to cut water by the same amount, because water reductions at the district level
consider current use before prescribing cuts. Santa Cruz residents consume far less water per
day (at 44 gallons/person) than the state average, and so must only reduce their water use by 8%
to meet Gov. Browns goal. On the other hand, residents of Coachella Valley, a popular
retirement location full of lush golf courses and sprawling lawns, consume about 282
gallons/person each day and must cut their water use by 36% (Park et al, 2015). Pressure to
reduce agricultural water allocation is likely to be stronger among water-guzzling districts in
southern California, as these are the regions that are experiencing the most pain from the April
executive order. Jack Healy and Adam Nagourney also note that tensions have risen between
different water districts, especially between Californias wetter north that pumps water to its
drier south and the dry south whose excesses necessitate pumping (Healy and Nagourney,
2015). The tension between different urban regions in California does not bode well for a
unified front to pressure the agricultural sector to share reductions in water use.
In addition, not every resident within the urban sector has been forced to reduce water use
by the same amount. Water scarcity has certainly driven water prices up. Utility companies also
charge higher per-gallon prices the more water an individual uses. This should incentivize
conservation, but wealthy individuals can afford to ignore high prices and absorb penalties from
using too much water. This makes water conservation a less salient concern for those who are

wealthy enough to ignore it. On the other hand, those who are genuinely invested in reducing
water consumption or who cannot afford to be liberal with their water use have taken steps to
conserve. Some time their showers, forgo the carwash, collect dish water in buckets to water
their yards, and more (Storey, 2015). Many lower or middle class families feel as though they
are being held disproportionally responsible for conserving water, creating a divide between
waters frugal and spendthrift users (Healy and Nagourney, 2015). Similarly to the
agricultural sector, division along class lines may prevent consensus among different members of
the urban sector.
Under Libecaps framework, the heterogeneity of both of the urban and agricultural
sectors indicates that bargaining between the two groups will not be an easy process. Libecap
argues that certain divisions are especially harmful to bargaining: differences inwealth and
political experience will make the formation of winning political coalitions and agreement on
new allocations of property rights challenging (p. 22). A reduction in the water allocated
towards the agricultural sector may disproportionally benefit or harm certain groups, as I will
discuss later, which can make it difficult to secure agreement among all parties involved.
3. The concentration of current and proposed resource distributions.
Currently, there is no formal petition to ask the agricultural sector to reduce its water use.
However, there certainly is a strong push from the urban sector to decrease the amount of water
allocated to the agricultural sector by requiring that the farming sector share equally in
conserving water. Under the current water rights system, the farming sector uses 40.9 million
acre-feet (13 trillion gallons) of water each year, amounting to 80% of all human water use in
California. The urban sector, on the other hand, uses only 5.2 million acre-feet of water per year

(1.6 trillion gallons). Currently, water rights are highly concentrated in the agricultural sector
(California Water Alliance).
Following Libecaps framework, it is inevitable that the urban sector would eventually
become dissatisfied with this concentration of water rights and would act to change the water
rights arrangement. According to Libecap: very skewed rights arrangements lead to political
pressures for a redistribution of wealth, especially when the there are relatively few people who
benefit from the current rights arrangement (p. 24). At 2% of Californias population, the
agricultural sector represents a very small group wielding disproportionately large claims over
water.
The proposed distribution of water rights would only reduce the agricultural sectors
share of water by 1.5% to 40.3 million acre-feet. The proposed distribution does not concentrate
water use rights in the urban sector; it only barely reduces the concentration of water use rights
in the agricultural sector. According to Libecap, this should facilitate the process of contracting
for property rights.
4. The size of expected gains or losses from changes in property rights allocations.
It is difficult to estimate how much loss the agricultural sector would suffer from a
mandate to conserve 1.5% of total water, especially because losses would not be evenly shared
among different regions or even among different farmers within the same region. The farming
sector has already taken a $2 billion hit from the drought in 2014, despite the high frequency of
drilling for groundwater. In 2014, farmers were forced to allow 400,000 acres of land to go
fallow and may fallow as much as 600,000 acres this year in response to the drought (Egan,
2015). $2 billion is not an insignificant figure: it represents a 4% loss to a $50 billion industry.
However, some commentators note that the agricultural industry can afford to become leaner by

using water more efficiently and shifting production towards higher-value crops that use less
water. Jay Lund, professor of environmental engineering at UC Berkeley, predicts that even if
total water use in the agricultural sector were cut in half (which is not likely unless this drought
continues for several decades), profits in the agricultural sector would only fall by 25%
(Fountain, 2015). However, more relevant than the total expected losses from a shift in water
use rights are the distribution of losses towards certain regions or groups of people.
Certain regions would disproportionally shoulder losses in profit. The majority of
agricultural water is used in the Central Valley region. This region is especially vulnerable to
drought, as it fails to manage groundwater sustainability. One of the major reasons is that the
Central Valley region is home to many lucrative perennial crops (Mount, Freeman, and Lund,
2015). These perennial crops include water-guzzling almonds, walnuts, oranges, peaches, and
other fruits and nuts that grow on trees (Buchanan, Keller, and Park, 2015). Yet, the high market
value of these crops, especially almonds, has led farmers to irresponsibly plant great numbers of
perennial crops. There are 860,000 acres of almond orchards in California, and in some regions,
farmers continue to plant almond trees despite the drought (Egan, 2015). Lucrative perennial
crops require an investment of several years before they reach full maturity. In times of water
shortages, farmers are therefore incentivized to drill for groundwater in order to avoid the loss of
years of investment that would occur if they failed to water their perennial crops. Central Valley
farmers, heavily invested in perennial crops, are not well prepared to absorb additional
reductions in water resulting from changes in legislation.
In addition, farmers with less senior water rights would face worse losses than those with
more senior rights. In California, the state owns all water, but grants usufruct rights to its
citizens. Use rights are granted through the rule of first possession which results in a

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hierarchy/ladder of water rights (Brewer et al., p. 4). The drought has affected those near the
middle and bottom of the ladder more strongly than those at the top. Those near the top of the
ladder who do not use up their entire allocation of water can sell, lease, or transfer their water
rights to others, but water scarcity in the agricultural sector drives up water prices, making the
cost of water prohibitive for some farmers. If there are no water sellers in a particularly droughtstricken district, the farmer is forced to drill for water (if he has the money to) or fallow his
crops.
With 400,000 acres of land fallowed last year, landowners needed far less farm help than
usual. In the town of Mendota (Central Valley), many people are traveling 60 or 70 miles to
look for workand families are increasingly relying on food donations (Nagourney, Healy, and
Schwartz, 2015). Low-income agricultural workers who barely scrape by during normal-rainfall
years find themselves out of work when farmers are forced to fallow their fields. Many of these
same poor communities rely on well water which has dried up or been diverted when a nearby
farmer drilled for groundwater and drained an aquifer in their community. The losses from a
reduction in water rights would disproportionally impact communities of poorly-educated,
Spanish speaking individuals, as these low-income workers are the first to get laid off and are the
least capable of affording drills to maintain their own water supply.
Expected gains in the urban sector from a change in water rights allocation are more
abstract. Some industries have seen their profits rise as a result of water scarcity; for example,
landscaping services are in high demand as many urban residents replace their lawns with native
flora. The pool industry has taken a hit as some counties began instituting moratoriums on
installing new pools. Energy production has also been strongly impacted. Water is an important
cooling agent in electricity and oil production and plays a key role in hydraulic fracturing

11

(Daniels, 2015). It is also difficult to measure an individuals utility from having a green lawn, a
long shower, or a full swimming pool, so non-industry gains from an increase in water use are
nearly impossible to gauge. If water were less scarce, water prices would drop, granting
individuals more disposable income. This should lead to increases in consumption, supporting
urban economic activity. However, the magnitude of economic activity in the urban sector that
would result from a change in water rights may not be large overall.
The expected losses to the agricultural sector are disproportionally large towards those
who grow water-guzzling perennial crops, towards farmers with less senior water rights, and
towards already poor farming communities. However, aggregate losses to the farming sector
would perhaps only amount to a few percent of the industrys total profits. Total gains,
combined between the urban and agricultural sector, could potentially be negative, though.
According to Libecap, small expected aggregate gains undermine efforts to contract for property
rights, as the new proposed rights arrangement may not make society much better off as a whole.
The small social gains (or perhaps negative gains) to be expected from a change in water rights
make it less likely that the urban and agricultural sector will successfully contract for a new
allocation of water rights.
5. Information asymmetries between bargaining parties.
The information asymmetries between the urban and agricultural sector are also difficult
to estimate, but there is potential for them to be quite large. It is challenging to measure the
volume of groundwater left in aquifers and underground basins and therefore challenging to
assess how pressing the need for water conservation is. With few regulations on drilling,
measuring how much water farmers are currently extracting is also difficult. Even measuring
surface-level water use is a challenge, as farmers must only report their water use every year or

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every three years, depending on their water rights seniority (Measure Californias Water,
2015). However, farmers are likely to have much better estimates than the urban sector. They
are also more fully aware of the impacts of water reduction on their profits, including the longrun impacts of water scarcity, which are much smaller than short-run impacts, as in the long-run
farmers can shift production to more profitable crops. Potential information asymmetries reduce
the likelihood of smooth bargaining, by complicating the necessity for political side payments.
According to Libecaps framework, information asymmetries only serve to slow down the
contracting process, which does not bode well for contracting between Californias urban and
agricultural sectors.
Conclusion
By investigating the California drought through Libecaps framework, we can conclude
that bargaining between the urban and the agricultural sectors is likely to be a slow and difficult
process. The two major parties are fairly heterogeneous, which undermines in-group unity and
consensus. Aggregate social gains are likely to be small or perhaps even negative, undermining
pressure to reallocate property rights. There is the potential for large information asymmetries
between the parties. However, the current distribution of water rights is highly concentrated in
the agricultural sector, which does increase political pressure for reallocation of property rights
from the urban sector, as evident in the criticism Gov. Brown has faced for exempting the
agricultural sector from the statewide 25% reduction in water use. Is the gross concentration of
rights in the agricultural sector enough to drive the successful contraction of new water use rights
between the two sectors? As California enters into a hot, dry summer, the impact of the drought
will be strongly felt by both sides, the need for water conservation will become even more

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apparent, and Californians will be forced to take pause and question the future of their state amid
ever growing water scarcity.

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