Journal of Law, Economics, and Organization Advance Access published online on May 4, 2008
Journal of Law, Economics, and Organization, doi:10.1093/jleo/ewn006
Chinatown Revisited: Owens Valley and Los Angeles—Bargaining Costs and Fairness Perceptions of the First Major Water Rights Exchange
University of California, Santa Barbara
*Professor, Bren School of Environmental Science and Management and Economics, University of California, Santa Barbara, CA 93106, USA. Email: glibecap{at}bren.ucsb.edu. Research Associate, National Bureau of Economic Research, and Fellow, Hoover Institute.
I examine a complicated bargaining problem in the acquisition of private land and water rights by Los Angeles in Owens Valley. This is a pivotal episode in the political economy of contemporary western water. More broadly, Owens Valley provides empirical evidence on how the gains from exchange were divided among the parties and how equity concerns shaped the process and succeeding assessment of market allocation. Negotiations for key properties took place within a bilateral monopoly context, and the bargaining strategies of both parties raised the transaction costs of exchange and formed fairness perceptions about the outcome of the exchange. I analyze the bargaining environment and estimate the determinants of when properties sold and the prices paid for land and water. Farmers who colluded did better by selling the properties than if they had remained in agriculture. Their "cartels," however, were not strong enough to secure more of the surplus from reallocating water from agriculture to urban demand. Most of the gains went to Los Angeles landowners, and this is a source of the notion of water "theft" that continues today.