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RISK ANALYSIS AND WATER MARKET ACTIVITY presents an analytical framework to analyze the factors that explain water rights transactions in the context of an economy with a water rights market and a spot market for water volumes. Main hypothesis is that risk heterogeneity among farmers can explain transactions in the former market. Investment decisions on water rights are modeled under output risk and uncertainty generated by future water availability and price. Using farmer micro-level data from a two-round survey conducted on a sample of farmers in the northern part of Chile, the hypothesis of homogeneous preferences among farmers is rejected. This evidence also suggests that better educated and more experienced farmers are less risk- averse. Results also show that water, labor and fertilizers have a positive impact on mean output per hectare but their effect on yield variability implies that those inputs are risk increasing.

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Oscar Cristi is a Professor of Economics at Universidad del Desarrollo, Chile.

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