How Transaction Costs Obstruct Collective Action: Evidence from California's Groundwater​

Our work on what determines management regime in California's 445 groundwater basins has just been released as an NBER working paper. We find that while in general basins adopt stronger extraction controls as the benefits of those controls rise, transaction costs of bargaining over the rules in large basins with many heterogeneous pumpers impedes collective action and limits the adoption of pumping controls. The abstract is below. CLICK HERE for the paper.

Abstract:

Collective action to remedy the losses of open access to common-pool resources often is late and incomplete, extending rent dissipation. Examples include persistent over-exploitation of oil fields and ocean fisheries, despite general agreement that production constraints are needed. Transaction costs encountered in assigning property rights are an explanation, but analysis of their role is limited by a lack of systematic data. We examine governance institutions in California’s 445 groundwater basins using a new dataset to identify factors that influence the adoption of extraction controls. In 309 basins, institutions allow unconstrained pumping, while an additional 105 basins have weak management plans. Twenty of these basins are severely overdrafted. Meanwhile, users in 31 basins have defined groundwater property rights, the most complete solution. We document the critical role of transaction costs in explaining this variation in responses. This research adds to the literatures on open access, transaction costs, bargaining, and property rights