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Abstract
The relative merits of different systems of property rights to allocate water among
different extractive uses are evaluated for the case where variability of supply is
important. Three systems of property rights are considered. In the first, variable
supply is dealt with through the use of water entitlements defined as shares of the total
quantity available. In the second, there are two types of water entitlements, one for
water with a high security of supply and the other a lower security right for the residual
supply. The third is a system of entitlements specified as state-contingent claims.
With zero transaction costs, all systems are efficient. In the realistic situation where transaction
costs matter, the system based on state-contingent claims is globally optimal,
and the system with high-security and lower security entitlements is preferable to the
system with share entitlements.