Agricultural Water Trading Restrictions and Drought Resilience

Policies that seek to reduce groundwater open-access externalities may be in conflict with the facilitation of water trading during droughts. Using panel data on cropland values, we examine this interaction in the context of groundwater export restrictions. We find that land subject to restrictions experienced a relative decline of 34% ($2,057/acre, roughly half of foregone potential water sales revenue) during the drought immediately following implementation of the policies. During a later, more severe drought, there is no difference in value. Our empirical approach also provides novel estimates of the value of changes in groundwater stock.