Division of Economics and Business Working Paper Series Economic Incentives and Conservation: Crowding-in Social Norms in a Groundwater Commons

Price-based interventions can be corrective where users extract from a common resource, but may also impact existing social norms, often crowding them out. In contrast, I find a pumping tax implemented by a group of irrigators in Southern Colorado effectively crowded-in pro-conservation norms, enhancing the financial incentive’s impact. Using a unique, spatially oriented panel-data set of groundwater wells, I separate the direct role of increased pumping costs from the indirect effect transmitted through altered conservation norms. To quantify conservation, I estimate how pumping at one well responds to pumping at nearby wells, instrumenting with pumping permits, and interact that behavior with a difference-in-difference framework. The fee directly accounts for approximately 61% of the reduced pumping and the remaining 39% comes from crowding-in conservation norms. I hypothesize the internal process provided a signal of group commitment and the knowledge that others are paying a fee lead to more unconditional conservers. JEL classifications: Q15, Q25, H23