Law and the New Institutional Economics: Linking Insights and Research

1. Law and the New Institutional Economics: Linking Insights and Research Gary D. Libecap University of California, Santa Barbara National Bureau of Economic Research Hoover Institution, Stanford Mapping the Frontiers of New Institutional Economics June 11, 2008, University of Colorado School of Law

2. The New Institutional Economics • Focuses on the interaction between formal and informal institutions, including the law, and economic behavior. • Institutions to reduce uncertainty, sources of information, reduce the transaction costs of exchange. Coordinate collective action. • Promote trade, production, investment. • Used for redistribution. • Efforts to mold institutions.

3. The Challenge: Operationalizing the NIE • Institutions are inherently difficult to measure. • Clarity in definitions and measurement. • Clear methodology and hypotheses. • Data (quantitative and qualitative) for testing. • Generalizations from the specific to the general.

4. Water Law, Transaction Costs, and Water Markets • California case study. Interaction between water law and observed water exchanges, 1987-2005. • Problem: Need to re-allocate water from historical uses in agriculture to urban and environmental uses. Large differences in relative values. • Water is not land. Interdependencies, bounding, and measurement issues. Regulatory role. Resistance to markets. • Precision in which water rights are defined and the nature of the regulatory review process may affect water exchanges.

5. Water Institutions and Markets • Courts, legislation, administrative rulings (State Water Resources Control Board): water rights and transfers. • Beneficial use, conservation, fallowing • Standing in regulation • Parties involved—rights owners, irrigation districts, Bureau of Reclamation, Department of Water Resources, Federal Central Valley Project • Endangered species, other third parties. • “No injury” rule.

6. Water Rights and Markets • The Data • Patterns of transactions • Types of contracts used

7. Water Transactions

8. Water Transactions

9. Water Transactions

10. Water Transactions

11. NIE Analysis • Measurement • Approach • Conclusions

12. NIE Analysis: Data on Legal Change in California

13. NIE Analysis: Data on Legal Change in California

14. NIE Analysis: Data on Legal Change in California • Analysis of each statute, court ruling, and agency opinion in California 1980-2005 • Subjective opinion of law students if there was a “significant” change in the law. • “1” coded and then remained, reflecting a permanent change in the institutional environment. • “1” coded if any category had another significant change.

15. NIE Analysis: Data on Legal Change in California

16. NIE Analysis: Data on Legal Change in California

17. NIE Analysis: Data on Legal Change in California

18. NIE Statistical Analysis • Number and Quantity of Transactions = f(Year Variables, Controls: precipitation, population, canals, state GDP, ag share, other ag data-land in farms, harvested, etc- per capita income)

19. NIE Statistical Analysis Determinants of the Number of Water Transfers

20. NIE Statistical Analysis Determinants of the Volume of Water Transferred

21. NIE and Legal Analysis • Legal institutions can impact the transactions costs of exchange. • Interaction between water law and water market transactions. • Drought • Population pressure • Legal change has an observed impact on the number and quantity of water exchanged. • Legal structure means that most activity is via one-year leases • Example of the application of the NIE to study of the interaction between law and economic behavior.