In this study, an operating water market inside an
agricultural area in Northern Chile was analyzed.
The author collected information from farmers who
used this very special market during an extreme
drought that lasted three years, and estimated a
model of water transactions using real data in order
to evaluate how much does this peculiar market
worked for them in terms of economic efficiency.
Both static and dynamic issues are tackled in a more
theoretical modeling to show that the increasing
presence of permanent crops (mainly grapes) and
coordination failures in investments in this area
would make the water market less responsive and
effective (in efficiency terms) in the long term.
The main conclusion is not to avoid the operation of
the water market but to design better rules and
regulations for improving its performance.