As a new resident of Los Angeles, I have wondered where my water comes from. It never rains yet I have millions of neighbors who reveal a taste for green lawns and private swimming pools. Owens Valley Revisited answers my question. It provides a fascinating account of Los Angeles's quest for water starting in the early twentieth century. While the Coase Theorem offers a sharp prediction concerning the ultimate allocation of water when rural property owners negotiate with wealthy urban demanders, Gary Libecap provides a detailed account of the messy bargaining process featuring transaction costs, holdup problems, and the unequal distribution of the gains from trade.

The Owens Valley case continues to generate wide academic and popular attention. Consider the movie Chinatown. This Oscar-winning film helped to perpetuate and cemented the “myth” that corrupt Los Angeles stole its life-sustaining water supply from unsuspecting Owens Valley farmers. Will Jack Nicholson star in a movie adaptation of this book? I hope so.

Gary Libecap's book challenges the conventional wisdom that a “theft” took place. Libecap carefully documents that there were gains from trade but that the majority of the gains went to the urban buyers. “There was a growing city, Los Angeles. And there were small farmers in Owens Valley with water and land to sell. Given the decline in the U.S. agricultural economy in the 1920s and 1930s, they likely knew that their farms were too small to be sustained in the present state over the long haul, especially given the deterioration of rural communities across the country. Accordingly, even had Los Angeles never been part of the Owens Valley picture, consolidation and out-migration would have taken place, just as was occurring in other Great Basin areas. Because the farms were much smaller in Owens Valley than elsewhere in the region, the process would have been even more dramatic. With the agricultural depression of the 1920s, this inescapable situation was facing farmers throughout the area. Los Angeles's demand for land and water rights offered small farmers a wonderful opportunity out of the growing dilemma they were facing” (p. 64).

In presenting his reassessment, Libecap nimbly presents a timeline of events while incorporating original empirical analysis. Technical material is not relegated to a “data appendix.” He has collected some fascinating micro data that allow him to present a series of hedonic regressions. In these specifications, his dependent variable is the price per acre of farmland and the price per acre of water. These hedonic regressions allow him to measure the price premium that farmers who joined seller cartels enjoyed relative to stand-alone farms. Another noteworthy data set that he has assembled is at the transaction level to present new facts on negotiations showing the seller's ask price, the bidder's bid price, and the mediator's final offer (Table 4.1, p. 76).

The book is uniquely positioned as a historical study that contributes to urban, environmental, and behavioral economics. Given the ongoing growth of parched cities such as Phoenix, San Diego, Los Angeles, and Las Vegas, water markets will remain a topical public policy subject. Unlike many economic history books, this book seamlessly moves from historical events to the present. Trends in recent western water transfers are discussed in detail using a data set covering the years from 1987 to 2005.

Climate change may further exacerbate water scarcity in the Southwest, and this will raise the stakes even higher in developing institutions that facilitate water trade. Much of the evidence for testing behavioral economics' theories comes from the experimental laboratory. By delving into the nitty-gritty of the dynamic bargaining game between the urbanites and the Owens Valley farmers, this book contributes to research on “fairness.”

The perception that the trades were not fair raises an important counterfactual that may influence trading behavior today. If water sellers today believe that past farmers did not receive a “good deal” from the first great water transfers, then does this retard contemporary water market transfers? In a chapter titled “The Owens Valley Syndrome,” Libecap provides a subtle review of the academic and popular literature's viewpoint. “Rather, the overwhelming view of the water transfer in the academic and popular presses is a very negative one. The general themes are theft of the valley's water; destruction of the local agricultural economy; and colonization (hydrocolonialism) of the region by a remote, disinterested city. According to the popular view, powerful, unscrupulous promoters of Los Angeles grabbed the valley's water and “flushed” it down the Los Angeles Aqueduct, converting previously verdant farmland of orchards and other irrigated crops into desert and leaving the skeletons of abandoned homesteads, empty schoolhouses and dry ditches” (p. 12). He makes a convincing case that this rosy view of Owens Valley's counterfactual future circa 1930 does not match the reality.

How could such a “disconnect” between perception and reality persist for so long? Do people simply root for David to defeat Goliath? An asymmetric pressure group explanation might argue that the winners from the trade are millions of dispersed faceless urban consumers while the “losers” are a small group of identifiable farmers.

This book should be widely adopted in environmental law classes as it showcases the power of empirical economic history in reevaluating the causes and consequences of an episode that continues to influence public policy.