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Water 2014, 6(11), 3457-3477; doi:10.3390/w6113457

Understanding Irrigator Bidding Behavior in Australian Water Markets in Response to Uncertainty

1
School of Commerce, University of South Australia, Adelaide 5000, Australia
2
Faculty of Business and Economics, Monash University, Caulfield East 3145, Australia
3
Department of Economics, Monash University, Clayton 3168, Australia
*
Author to whom correspondence should be addressed.
Received: 10 September 2014 / Revised: 30 October 2014 / Accepted: 31 October 2014 / Published: 14 November 2014
(This article belongs to the Special Issue Water Resources in a Variable and Changing Climate)
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Abstract

Water markets have been used by Australian irrigators as a way to reduce risk and uncertainty in times of low water allocations and rainfall. However, little is known about how irrigators’ bidding trading behavior in water markets compares to other markets, nor is it known what role uncertainty and a lack of water in a variable and changing climate plays in influencing behavior. This paper studies irrigator behavior in Victorian water markets over a decade (a time period that included a severe drought). In particular, it studies the evidence for price clustering (when water bids/offers end mostly around particular numbers), a common phenomenon present in other established markets. We found that clustering in bid/offer prices in Victorian water allocation markets was influenced by uncertainty and strategic behavior. Water traders evaluate the costs and benefits of clustering and act according to their risk aversion levels. Water market buyer clustering behavior was mostly explained by increased market uncertainty (in particular, hotter and drier conditions), while seller-clustering behavior is mostly explained by strategic behavioral factors which evaluate the costs and benefits of clustering. View Full-Text
Keywords: water allocation market; price clustering; uncertainty; strategic behavior water allocation market; price clustering; uncertainty; strategic behavior
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).

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MDPI and ACS Style

Zuo, A.; Brooks, R.; Wheeler, S.A.; Harris, E.; Bjornlund, H. Understanding Irrigator Bidding Behavior in Australian Water Markets in Response to Uncertainty. Water 2014, 6, 3457-3477.

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