Water Markets

Water Markets in Mula (Murcia), Spain


We use data on sequential water auctions to estimate demand when units are complements or substitutes. A sequential English auction model determines the estimating structural equations. When units are complements, one bidder wins all units by paying  high price for the first unit, thus deterring others from bidding on subsequent units. When units are substitutes, different bidders win the units with positive probability, paying prices similar in magnitude. We recover individual demand consistent with this stark pattern of outcomes and confirm it is not collusive, but consistent with non-cooperative behavior. Demand estimates are biased if one ignores these features.

Substitutes Complements

In 1966, after over 700 years, the irrigation community in Mula (Spain) switched from auctions to quotas to allocate water from its river. This change happened in the absence of either political or technological change. Quotas were more efficient but required that farmers own water property rights. I develop a model in which poor farmers cannot credibly commit to purchase water rights. I show that empirical evidence on savings and prices is consistent with this interpretation. A temporary increase in output prices in the 1950s and better financial institutions allowed farmers to accumulate savings and solve the commitment problem.

Auction sheet from 1803 Offering to buy all water rights for 4.2M


Water is an essential commodity and there is controversy over whether it should be allocated using markets. In 1966, the irrigation community in Mula (Spain) switched from a market institution, to a system of fixed quotas to allocate water from the town’s river. Due to the lack of output data, we estimate demand for water accounting for liquidity constraints (LC) and data during the auction period, and compute the welfare under each system. We get unbiased estimates for both farmers’ demand for water and their financial constraints. Ignoring the presence of LC biases the estimated demand and its elasticity downwards. Moreover, markets are efficient only in the absence of LC . We compute welfare under both institutions and find that the quota is more efficient than the market, due to concavity and idiosyncratic productivity shocks.

Agricultural Census (1954) Real Estate Tax Registry (1954)


  • “Let the Punishment Fit the Criminal,” with Javier Donna

We investigate the role of punishment progressivity and individual characteristics in the determination of crime. We model individuals’ response to judges’ optimal punishment in a dynamic setting. Agents have both persistent and transitory unobservable components. Judges observe a public signal that is correlated with the transitory component and update their beliefs about the persistent component based on past behavior. For the empirical analysis we examine a novel trial data set from a self-governed community of farmers in Spain in which: (i) judges usually impose low fines even though punishment is not costly; (ii) recidivists are punished harsher than first-time offenders for the same crime; (iii) judges vary the degree of punishments based on individual characteristics—such as when victims or accused have a Don honorific title indicating they are wealthy. Punishments are harsher when the accused is a Don and are milder when the victim is a Don. All these empirical facts can be explained by a model in which the community trades off deterrence and insurance.

We are thankful to Fernanda Donna and Antonio Espín for their assistance. We are also thankful to Juan Gutiérrez for his help in finding the data and to Antonio and Pepe at the Municipal Archive in Mula.

During the reign of Ibn Hud (1228-1238), the Kingdom of Murcia enjoyed some prosperity and stability. After the weakening of the Almohads, Ibn Hud unified all the small muslim kingdoms (Taifas) in the peninsula. When Ibn Hud was murdered in 1238, the kingdom was dismembered into many Taifas. This same year Jaime I (King of Aragon) conquered Valencia and prepared to march south. Castile was also advancing to the south, expanding its territory at the expense of the now fragile Kingdom of Murcia, which territory was now a fraction of what it was under Ibn Hud. By 1242, Castile had conquered most of the kingdom. Ahmed, the son of Ibn Hud, traveled to Alcaraz (Toledo) to meet prince Alfonso (later known as King Alfonso X, the Wise ). They agreed that what remained of the Kingdom of Murcia would become a protectorate of Castile.

The cities of Mula and Lorca rejected this agreement. In April 1244, Alfonso was in Murcia with his army ready to attack Mula (the closest of the rebel cities). After Mula was conquered, the army moved to Lorca, which surrendered by the end of June. The government of Mula and Lorca was given to the Order of Santiago and the Order of the Temple, respectively. The government of the city of Murcia was given, in part, to the descendants of Ibn Hud according to the terms of the Alcaraz Treaty. However, the Order of Santiago and the Order of the Temple had absolute authority over the cities of Mula and Lorca respectively, because the cities were conquered by force. In each city, the Orders separated the ownership of land and water, and created a corporation with tradable shares, whose owners got money from selling in public auctions the rights to use the water from the river.

Under these new institutions, the owners of the water property rights (Waterlords) were different persons than the land owners (farmers). The Waterlords in Mula established a well-functioning cartel (Heredamiento de Aguas) which lasted through the pre-modern era, despite the many political changes that occurred in Spain. The land owners were small proprietors, with family-size plots, who soon after created their own association, Sindicato de Regantes.