An experimental analysis of water leasing markets focusing on the agricultural sector

•Lease prices are higher in times of water scarcity.•Prices are higher for ag-to-ag transactions then ag-to-urban municipalities or environmental interests.•Leasing allows for the protection of a capital investment reducing inter-seasonal risk.•The distribution of welfare from market transactions tends to benefit agricultural users more than urban municipalities.•Urban municipalities are able to acquire temporary water in times of excess water availability.

Climate variability, population growth and persistent droughts present water managers with challenges in allocating ever scarcer water resources. Water marketing intuitions that allow for the temporary transfer of water between water users can provide water managers and users with the ability to manage this challenge with minimal conflict. This paper develops a water market for temporary transfers for the Middle Rio Grande, NM as a test case to provide water managers and users with insight to a functioning market prior to implementation. Using the techniques of Experimental Economics the developed marketplace provides insights to two key questions: (1) does the value of water rights differ by the types of users engaging in the transaction, (2) how is economic welfare distributed amongst water users as a result of market transactions. The results of the experiments demonstrate that water values differ across trading partners and economic welfare gains as a result of market transactions are largest for capital crop farmers.