by Fiona Burlig, Louis Preonas, and Matt Woerman
How do agents respond to policy when investments have high up-front costs and lasting payoffs? We estimate farmers’ short- and long-run responses to changes in groundwater pumping costs in California—where perennial crops with these features are prevalent—using both fixed effects and dynamic discrete choice models that leverage quasi-experimental variation. In the short run, farmers’ groundwater demand elasticity is −0.76, and they do not change crops. In contrast, the long-run elasticity is −0.38, driven in part by meaningful reductions in water intensive perennial cropping. Meeting California’s sustainability targets would require reallocation of 9% of acres, including a 50% increase in fallowing.