Virtual water trade in times of drought - do property rights matter?

Abstract: The issue of water scarcity has been recognised as one of the greatest threats against global development. One of the proposed solutions to this issue is the indirect reallocation of freshwater through trade in agricultural products, also known as virtual water trade. This paper introduces water property rights as a determinant for trade in virtual water. Building on earlier work on trade in environmental resources and property rights, we estimate the volume of US interstate virtual water flows from Iowa, Kansas and Missouri during 2009-2014 in three major agricultural commodity groups. By estimating the effect of the Midwestern drought 2012 on the virtual water flows for the different states, we analyse the importance of water property rights as a determinant for virtual water flows. Our results are inconclusive, suggesting a need for further research in the area.