Description: Department Seminar

Location: 368A Heady Hall

Contact: Donghyuk Kim

Title: Liquid Markets: An Empirical Analysis of a Water Exchange

Abstract: This paper analyzes the performance of one of the world’s most developed water exchanges, which operates as a primitive limit order market. I document potential sources of inefficiency from exchange data. Then, upon modeling participants’ choice of order price and order type, I identify their latent value distributions from observed orders and trades, extending to a model that allows endogenous order quantities. Counterfactual simulations suggest the observed exchange attains substantially lower trade surplus than the benchmark of periodic uniform-price market clearing. The efficiency gap is worse in periods of drought or low liquidity. Nonetheless, exchange design has more impact than observed liquidity expansions from opening interzone trade limits. I assess the role of poor aggregation, price shading, and temporal dispersion in explaining the gap. In particular, poor aggregation linked to the transaction fee structure emerges as an important culprit and target for practical reform.