Institutional Inertia: Persistent Inefficient Institutions in Spain

Abstract

In 1966, after more than 700 years, the irrigation community in Mula (Spain) switched from auctions to quotas to allocate water from its river. This change happened in the absence of either political or technological change. Quotas were more efficient, but required that farmers own water property rights. I develop a model in which poor farmers cannot credibly commit to purchase water rights. I show that empirical evidence on savings and prices is consistent with this interpretation. A temporary increase in output prices in the 1950s and better financial institutions allowed farmers to accumulate savings and solve the commitment problem. There is nothing more difficult to arrange, more doubtful of success, and more dangerous to carry through, than to initiate a new order of things. Niccolò Machiavelli, The Prince.