Between Forced Resumption and Voluntary Sale: A Mechanism for the Collective Sale or Transfer of Irrigation Water

Currently, the legitimate transfer of ownership of an asset occurs either through voluntary means - gift, bequest, sale - or through the use of state power - compulsory acquisition, resumption, eminent domain, court order. In Australia and elsewhere, compulsory acquisition of private property is followed by the payment of compensation, which may be too little or too great. This paper outlines an auction mechanism that is intermediate between the forced resumption of water entitlements and their voluntary sale. To be effective, the mechanism requires there to be competitive bidders in the auction, and so the mechanism would work best if there were an end to collusion between public agencies in the water market. The seller would be an irrigation district, which would be compelled by government to engage in the auction. The proceeds of any auction sale would be distributed to the individual irrigators, according to fixed and known fractional shares. However, in contrast with the use of forced resumption, under the Shapiro-Pincus mechanism no sale would be made unless each individual irrigator receives at least what he or she has nominated as a minimum required payment. This guarantee would be secured through the use of a secret reserve for the auction of the district's water entitlements. The combination of a secret reserve, competitive bidding, and the share mechanism gives individual irrigators a financial incentive to nominate truthfully what each requires as a minimum payment. The mechanism may have other applications, including helping to secure unanimous agreement within an irrigation district, to offer to sell all of the district's entitlements.