Collective Action by Contract

We analyze the economic characteristics of prior-appropriation water rights adopted across the US West in the 19th century. Much of the region’s massive irrigation infrastructure was developed by private irrigators. We develop a model to show how prior appropriation facilitated investment by securing water against future claims and defining a property right to a specific amount of water that was the basis for contracting among numerous heterogeneous agents. We construct a data set of over 7,000 water rights in Colorado from 1852 to 2013, including location, date, size, infrastructure investment, irrigated acreage, and geographic characteristics to test the predictions of the model. We find that prior appropriation facilitated cooperation through contracting, increasing infrastructure investment, and promoting irrigated agriculture that contributed up to 16 percent of western states’ income by 1930. Areas with preexisting norms for supporting collective action exhibit smaller differences in investment based on formal contracts.