Working Paper: NBER ID: w28706
Authors: Fiona Burlig; Louis Preonas; Matt Woerman
Abstract: How do agents respond to policy when investments have high up-front costs and lasting payoffs? We estimate farmers’ short- and long-run responses to changes in groundwater pumping costs in California—where perennial crops with these features are prevalent—using both fixed effects and dynamic discrete choice models that leverage quasi-experimental variation. In the short run, farmers’ groundwater demand elasticity is -0.76, and they do not change crops. In contrast, the long-run elasticity is -0.38, driven in part by meaningful reductions in water-intensive perennial cropping. Meeting California’s sustainability targets would require reallocation of 9% of acres, including a 50% increase in fallowing.
Keywords: groundwater; agriculture; crop choice; elasticity; California
JEL Codes: Q15; Q25; Q41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Groundwater costs (Q25) | Proportion of land allocated to high-value fruit and nut perennials (Q15) |
| Groundwater costs (Q25) | Fallowed land (Q15) |
| Groundwater costs (Q25) | Land in annual crops (Q15) |
| Groundwater costs (Q25) | Land in other perennials (Q24) |