Transaction risk versus transaction costs in water transfers

Transaction cost has been a frequent topic in theoretical and practical discussions of water transfers. However, the risk or probability that a transfer effort will be unsuccessful should also have a significant effect on the decision by potential water purchasers to seek water transfers in lieu of seeking water by conventional means (source capacity expansion or water conservation). The importance of the uncertainty of transfer completion is examined analytically under a decision theory framework. Some implications of uncertain transaction completion for water transfer policy are discussed. In general, seeking water transfers becomes more attractive to potential water purchasers if the probability of a successful transfer is increased, if more of the transaction costs for water transfers are incurred after a transfer has been approved, and if the costs of delaying implementation of alternative water supplies are small.