What lies beneath ? Aquifer heterogeneity and the economics of collective action

Institutions formed through local collective action can provide effective solutions to environmental and resource problems. Rigorous quantitative analysis of these issues is often missing, however, and the groundwater economics literature fails to address the role of these types of institutions. This paper explores how the physical properties of the groundwater resource affect the incentives of pumpers in Kansas to form local management districts. We provide a hydrologic model that makes predictions about the effect of aquifer characteristics on the incentives of pumpers to engage in management: users overlying portions of the aquifer that are held more in common benefit more from management, as do those whose pumping costs are most sensitive to decreases in water table elevation. We use spatial hydrologic data to test these predictions by observing the effect of aquifer characteristics on land value after the emergence of management, finding results consistent with the model. This case presents a generalizable example of how local or targeted solutions based on attributes of the physical system can be used to solve environmental and resource problems. JEL Codes: Q15, Q25, Q56, D70 Ph.D. Student in Economics at the Bren School ([email protected]). Updated versions will be posted at www.bren.ucsb.edu/∼eredwards. This paper has greatly benefitted from discussions with Gary Libecap, Terry Anderson, and Bob Deacon. I would also like to thank Ryan Abman, Dan Benjamin, Chris Costello, Paulina Oliva, PJ Hill, Matt Turner, Jordan Suter, participants at the PERC Summer Seminar Series, participants at the CU Environmental and Resource Economics Workshop, Tristan Wisner for his assistance with data analysis, and Leah Tsoodle, Bill Golden, and Brownie Wilson for graciously sharing data. All errors are my own.