Markets generate gains from reallocation but can impose losses on individuals and communities. We study whether compensation can address these distributional costs without sacrificing gains from trade. Australia's 2007 Murray-Darling Basin water-market reform provides a unique setting in which to measure both the local losses from reallocation and the productive gains available to compensate them. Exploiting differences in soil characteristics to instrument for reform-induced changes in water use, we document significant local economic spillovers from water leaving irrigated communities. We estimate that a 10% decrease in local water use leads to around a 3% decline in wages, a 7% decline in agricultural employment, and a 4% decline in population. We combine these estimates with a dynamic residential choice model to recover the distribution of community willingness-to-pay for water. The median community values irrigation at AUD $75/ML, with a 90th percentile of $167/ML. These community values are large relative to our estimated median agricultural marginal product of water of $215/ML. We use the joint distribution of private gains and community values to evaluate compensation mechanisms. With full information, private gains from trade can fully compensate selling communities while preserving 76.9% of profitable trades, rising to 92.7% when benefits to buying communities can also finance compensation. When community values are private information, these shares fall to 60.3% and 75.6%, respectively. Our results show how the heterogeneity of local losses, their relationship with reallocative benefits, and the information available to target transfers determine how well markets can share gains from trade.

Many proposed surface water transfers undergo a series of regulatory reviews designed to mitigate hydrological and economic externalities. While these reviews help limit externalities, they impose substantial transaction costs that also limit trade. To promote a well-functioning market for surface water in California, we describe how a new kind of water right and related regulatory practices can balance the trade-off between externalities and transaction costs, and how a Water Incentive Auction can incentivize a sufficient number of current rights holders to swap their old rights for the new ones. The Water Incentive Auction adapts lessons learned from the US government’s successful Broadcast Incentive Auction.

Media: [KJZZ Radio] [SIEPR] [Quartz]

We provide new evidence on the drivers of the early US coronavirus pandemic. We combine an epidemiological model of disease transmission with quasi-random variation arising from the timing of stay-at-home-orders to estimate the causal roles of policy interventions and vol- untary social distancing. We then relate the residual variation in disease transmission rates to observable features of cities. We estimate significant impacts of policy and social distancing responses, but we show that the magnitude of policy effects is modest, and most social distancing is driven by voluntary responses. Moreover, we show that neither policy nor rates of voluntary social distancing explain a meaningful share of geographic variation. The most important predictors of which cities were hardest hit by the pandemic are exogenous characteristics such as population and density.

Media: [Vox] [Forbes]

We introduce a novel measure of segregation, experienced isolation, that captures individuals’ exposure to diverse others in the places they visit over the course of their days. Using Global Positioning System (GPS) data collected from smartphones, we measure experienced isolation by race. We find that the isolation individuals experience is substantially lower than standard residential isolation measures would suggest, but that experienced andresidential isolation are highly correlated across cities. Experienced isolation is lower relative to residential isolation in denser, wealthier, more educated cities with high levels of public transit use, and is also negatively correlated with income mobility. Individuals are more isolated close to home and at locations like churches and schools, and less isolated at entertainment, retail, and eating establishments.

Despite large potential gains from trade, surface water markets remain thin. The regulatory burden of acquiring information to manage heterogeneous hydrological externalities has been proposed to explain limited trade. To distinguish valuable regulation from inefficient transaction costs, I estimate a spatial model of California's surface water market incorporating agricultural production, urban demand, externalities, and regulatory constraints. Targeting trade externalities costs $29 per acre-foot, compared with $35 in average marginal external harm. I compare costly precise regulation with two policies that avoid trade-specific information: a uniform tax and a uniform performance standard. Under existing institutions, costly precise regulation outperforms either alternative. After broader market reform, a uniform performance standard becomes preferable, doubling baseline trade volumes. A uniform tax instead permits costly high-externality trades. Apparent transaction costs can be the price of effective regulation, and optimal regulatory design depends jointly on information costs, externality heterogeneity, and market institutions.

Can carbon taxes and associated carbon border adjustments (CBAs) respect existing agreements in international trade while significantly reducing pollution from carbon emissions? This paper answers this question in the context of a quantitative trade-and-emissions model for both non-cooperative (Nash) and cooperative (international negotiation with participation constraints) carbon tax setting. We find that a climate agreement that deviates from the usual design of uniform carbon taxes applied across its members and instead entertains the possibility of country-specific carbon taxes as a means of addressing participation constraints can achieve substantial reductions in worldwide emissions and offer a meaningful WTO-consistent alternative to the climate clubs described by Nordhaus (2015) that confront non-participants with the threat of WTO-inconsistent Nash tariff punishments. And we find that the design of CBAs permitted by the WTO can impact the degree of worldwide carbon reduction and welfare improvements in important ways. In particular, our findings suggest that optimal WTO rules on permissible CBAs will evolve with the evolving success of international cooperation over climate policy.

We propose a sensitivity analysis for Synthetic Control (SC) treatment effect estimates to interrogate the assumption that the SC method is wellspecified, namely that choosing weights to minimize pre-treatment prediction error yields accurate predictions of counterfactual post-treatment outcomes. Our data-driven procedure recovers the set of treatment effects consistent with the assumption that the misspecification error incurred by the SC method is at most the observable misspecification error incurred when using the SC estimator to predict the outcomes of some control unit. We show that under one definition of misspecification error, our procedure provides a simple, geometric motivation for comparing the estimated treatment effect to the distribution of placebo residuals to assess estimate credibility. When we apply our procedure to several canonical studies that report SC estimates, we broadly confirm the conclusions drawn by the source papers.

Governments are increasingly turning to conservation auctions to adapt to a changing climate. While classic procurement auctions are designed to leverage competition between individual resource users, many natural resources incorporate local community control. For example, local jurisdictions manage land use, fishing cooperatives distribute catch quotas, and irrigation districts govern farmer water entitlements. In these settings, the planner must elicit willingness-to-accept from direct users and their relevant governing bodies. In this paper, we develop a theory of optimal procurement when the planner faces this nested governance: agents can contract only with their governing authority’s consent. Both agents and authorities are characterized by private values for the resource actions. Authorities also differ in the degree to which they internalize member welfare. Using mechanism design tools, we find that the optimal mechanism favors procurement from more altruistic communities, creating distortions that are absent from standard procurement theory. We show that optimal design critically depends on authority altruism. At one extreme, when governing authorities do not care about member surplus they act as monopsonistic intermediaries. On the other end, authorities that perfectly internalize member surplus align objectives with the social planner. We compare mechanisms that operate with varying degrees of information about authority altruism and rationalize why real-world conservation auctions often delegate procurement to authorities, rather than elicit information from agents directly. We then propose a clock-auction design that could realistically implement procurement under nested governance. We analyze the performance of different mechanisms using empirical estimates of private farmer and local community willingness-to-accept for surface water from Australia’s Murray-Darling Basin.