Ulric B. and Evelyn L. Bray Social Sciences Seminar

Abstract: This paper empirically analyzes the performance of one of the world's most developed water exchanges, which operates as a primitive limit order market and exhibits noticeable price dispersion. Upon modeling participants' choice of order price and order type, I identify their value distributions from observed orders and trades. The model flexibly allows for dynamics, risk aversion, and default behavior. Counterfactual simulations suggest the observed exchange attains substantially lower trade surplus than periodic uniform-price market clearing. Droughts exacerbate the gap in surplus per unit traded. I assess the role of volume frictions, price shading, and buyer-seller matching in explaining the gap.