Use It or Lose It: The Economic Consequences of Forfeiture Rules Under the Prior Appropriations Doctrine

This research highlight presents a developing economic model examining the consequences of water right forfeiture rules under the prior appropriations doctrine. The study explores how forfeiture provisions affect incentives for speculation, infrastructure investment, and water use as watersheds transition from initial settlement to full appropriation. In early stages of watershed development, weak or poorly enforced forfeiture rules can incentivize senior appropriators to over-claim water for speculative resale, creating economic inefficiencies and distributional impacts. As basins become fully appropriated and junior rights face higher curtailment risk, the value of senior rights increases, shaping investment and transfer behavior. Stricter forfeiture enforcement reduces speculative over-investment but may incentivize overuse of water to avoid forfeiture. The model suggests forfeiture rules are most economically valuable early in watershed development, with efficiency and distributional effects diminishing over time. Findings provide a framework for evaluating proposed legislative changes to forfeiture rules in mature western water markets.

This work was supported by the USDA National Institute of Food and Agriculture, project #1016467.