The illiquidity of water markets
José-Antonio Espín-Sánchez, Javier Donna 02 February 2014
Fresh water is becoming increasingly scarce. Policymakers worldwide are advocating water markets as a solution to this scarcity problem, but there remains considerable controversy about the efficacy of water markets. This column studies a water market that was in place for over 700 years in southern Spain and was replaced by a system of fixed quotas in 1966. The market was terminated because a system of quotas outperformed the market due to the presence of liquidity constraints. The findings imply that we should be cautious when advocating water markets in developing countries where liquidity constraints are important.
Seventy per cent of fresh water consumption worldwide is used for irrigation, and water is becoming increasingly scarce in regions such as India, Latin America and, more recently, the US (Barnett et al. 2005). Water markets are emerging as a solution to this scarcity (Grafton et al. 2011). Markets are generally thought to increase efficiency because there are gains from trade when users are heterogeneous in demand. However, there is substantial controversy about the efficacy of water markets in the presence of frictions (Johansson 2000).
auctions, liquidity constraints, quotas, water markets
Limited attention costs: Sometimes driving a mile costs $200
Nicola Lacetera, Devin Pope, Justin Sydnor 20 May 2011
People like to take shortcuts and this affects how we make decisions. Looking at auctions of more than 22 million used cars in the US, this column finds that buyers will often only pay attention to the first few digits of mileage. So if you have driven your car 30,000 miles, you might have to sell it for $200 less than if you had driven in 29,999 miles.
Imagine that you are in the process of buying a used car. You are considering a three-year-old Honda Accord, with 42,187 miles, and a five-year-old Toyota Camry, with 67,812 miles.
Now, close your eyes and try to remember the exact mileage of the two cars.
Chances are that you will recall the mileage of the Accord to be 42,000, or even 40,000, and the mileage on the Camry to be 67,000, or even 60,000.
Frontiers of economic research
auctions, decision making, memory
Central bank liquidity and “toxic asset” auctions
Paul Klemperer 25 September 2009
The crisis set policymakers scrambling for appropriate mechanisms to respond to financial turmoil. This column proposes a new auction design that can be used for toxic asset purchases and central bank liquidity auctions in a credit crunch.
The crisis began in early August 2007, and a bank run led to Northern Rock’s collapse in mid-September. The Bank of England wanted urgently to supply liquidity to banks and was therefore willing to accept a wider-than-usual range of collateral, but it wanted a correspondingly higher interest rate against any weaker collateral it took.
Financial markets Global crisis
auctions, toxic assets, global crisis
Auction greenhouse emission rights with targeted compensation
Lans Bovenberg, Herman Vollebergh 17 September 2008
The EU plans to auction permits for the next phase of emissions trading, rather than giving them away for free as in the past. This column explains why the new scheme is a significantly better policy and proposes compensation measures to redress the complaints of industries opposed to the new climate change policy. Harmonised EU action may be required.
The current system for tradable carbon emission permits in Europe suffers from severe shortcomings. EU member states hand out these permits without charge using criteria that result in perverse behavioural effects. For instance, some member states distribute permits based on current production. This provides an incentive to expand production capacity in order to obtain additional, valuable emission rights.
climate change, auctions
Nauro F Campos 03 May 2008
Art auctions are a testing ground for economic theory. This column summarises recent research that uses extensive data on works of Latin American art to study auction outcomes. Most puzzlingly, there is a persistent “afternoon effect,” in which identical goods auctioned later command lower prices.
The visual arts market, in general, and the prices commanded by paintings at the two leading auction houses, in particular, tend to peak at the end of economic expansions, so the various records broken so far in 2008 may spell mixed news. The arts market remains of interest to economists, though, as it an empirical testing ground for auction theory, in which interest has grown significantly in recent years (Klemperer 2004).
Frontiers of economic research
auctions, art, paintings