| In 1966, the irrigation community in Mula (Murcia, Spain) switched from an auction, which had been in place in the town for over 700 years, to a system of fixed quotas with a ban on trading, to allocate water from the town's river. The new institution is more efficient than the old one but it requires an egalitarian distribution of property rights. Hence, a transition into a more efficient institution may not happen because of the hold-up problem when the owners of property rights sell them to other agents with limited liability. I show how the hold-up problem was solved and led to a change into a more efficient institution.;I estimate both the demand for water and the financial constraints of the farmers, thus obtaining unbiased estimates. Markets achieve the first-best allocation only in the absence of liquidity constraints. In contrast, the quota achieves the first-best allocation only if farmers are homogeneous in productivity. The data shows that the quota is more efficient than the market. |
