Rules for water allocation in a small watershed: A game theoretic approach

Exchanges of either long term rights (property right transfer) or spot rights (rights rental) to water may result in third party effects that place practical limits on the geographic scope of a water market. The result will be a market with few eligible participants. A "thin" market suffers from strategic manipulation and allocational distortions. Using a game theoretic approach based on multilateral bargaining models, this study addresses the issue of designing trade rules to facilitate smooth functioning of a thin spot rights market operating in a variety of exchange environments.