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Irrigation districts (IDs) use a large portion of the surface water rights in the American West. Microeconomic analysis of water use conditions within IDs indicates that it can be economically optimal for IDs to engage in less reallocative activities compared to private water rights holders. Institutional insights combine to show that the political orientation of IDs favors irrigation over irrigators in the sense that the rewards of water marketing tend to be incompletely captured. Based on an analysis of 38 years of time series water transfer data, we found that IDs underparticipate in agricultural‐to‐municipal water transfers relative to non‐irrigation districts in terms of water right‐weighted transfers. The results support further policy redesign if reallocation is to be viewed as a scarcity‐solving strategy in ID‐dominated regions.

Irrigation districts (IDs) in the American west are highly diverse in their economic attributes and local water scarcity circumstances. This diversity may affect reallocative action via water transactions as scarcity rises. The institutional background defining and constraining IDs is described here. For a Texas study region the progress of permanent water right transfers involving IDs is documented and examined. An econometric analysis of multiple decades of ID water transfer activities in the Lower Rio Grande Valley finds that IDs with larger initial water right holdings and higher populations in nearby cities are more likely to participate in agricultural‐to‐municipal water transfer activities. The findings suggest that consolidation of smaller water right holding IDs may be an avenue for quickening the pace of reallocation, especially in more populated areas.