Do Property Rights Alleviate the Problem of the Commons? Evidence from California Groundwater Rights

Abstract

Property rights are widely prescribed for addressing overextraction of common pool resources, yet causal evidence of their effectiveness remains elusive. We develop a model of dynamic groundwater extraction to demonstrate how a spatial regression discontinuity design exploiting a spatially-incomplete property rights regime recovers a lower bound on the value of property rights. We apply this estimator to a major aquifer in water-scarce southern California and find that the introduction of ground- water property rights generated substantial net benefits, as capitalized in land values. Heterogeneity analyses suggest gains arise in part from tradeability of these rights, which enables more efficient water use.