The increase over the past two decades in water leases for environmental purposes now provides adequate data for a rigorous investigation into the factors affecting prices of water acquired. We develop econometric models of water leases for both environmental and nonenvironmental purposes in the western United States to gauge the effect of local population growth, income, drought, temperature, and development pressure on lease prices. We find both systematic similarities and differences in the price determinants of environmental and nonenvironmental water leases in the four western states of Arizona (AZ), California (CA), New Mexico (NM), and Utah (UT). Exploration of factors affecting prices of water purchased for environmental amenities is of practical importance to the many public agencies and NGOs involved in water acquisitions in support of environmental objectives. Moreover, examination of lease prices can complement nonmarket valuation techniques by revealing what factors influence the value of nonmarket amenities such as water-dependent habitat and stream flow levels (Loomis et al. 2003).
The econometric model developed here differs in important respects from the handful of previously published statistical models of water transaction data. The model presented draws upon 20 yr of transaction data for four U.S. states, with a specific focus on the role of temporary water transfers (leases) and on contrasting the influence of model variables on prices negotiated in environmental versus other types of transactions. The econometric models employed were tested for (and corrected for) common statistical problems encountered in using transaction data: endogeneity between observed prices and quantities traded; heteroskedasticity; and collinearity. The rigorous statistical analysis reported here adds to the collective understanding of the emerging market for water leases dedicated to environmental purposes, particularly the influence of weather and climate factors. Water leases to maintain and restore environmental amenities are likely to be an important adaptation strategy to the changing climate of the United States.
Johnston Dinardo Econometric Met
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