In the arid farming region of Murcia, Spain, the town of Mula had operated the same water auction system for more than 600 years—since the 13th century, farmers gathered weekly to bid for irrigation rights, assuming that markets would naturally direct water to those who needed it most. But new research from economist Javier Donna at the University of Miami has upended that assumption, revealing that when poor farmers lack the cash to compete, markets fail in ways that hurt productivity instead of helping it.
Donna's findings, published in the Review of Economic Studies alongside co-author Jose Espin Sanchez from Yale University, challenge the conventional economic wisdom that markets are inherently efficient. What Donna and Sanchez discovered in Mula was strikingly simple yet profound: wealthy farmers could outbid their poorer neighbors during peak irrigation seasons—not because they valued the water more, but simply because they had deeper pockets. The poor farmers, unable to afford the inflated auction prices when their crops needed water most, adapted by strategically buying water before and after critical growing periods, when prices dropped. Meanwhile, the wealthier farmers snapped up water during the seasons that mattered most for crop yields.
The researchers had a crucial advantage in identifying this pattern: the farmers in Mula were growing the same crops—mostly fruit trees—under identical environmental conditions. This meant biological need, not farmer preference, should have determined water demand. Any deviation from that pattern pointed directly to financial constraint. "The demand for water was determined by the biology of the trees, not the wealth status of the farmers," Donna explained. "That allowed us to identify which farmers were truly constrained financially, rather than simply preferring to buy less water."
What the data revealed was damning for market-based allocation: in 1966, when Mula abandoned auctions entirely and switched to a quota system—where each farmer received a fixed, equal share of water—agricultural productivity jumped by approximately 6%. It was a result that surprised even Donna. "We went into this expecting to confirm the conventional wisdom that markets outperform quotas," he said. "Instead, the data kept telling us the opposite story."
The implications ripple far beyond a small Spanish farming community. As water scarcity intensifies globally and droughts spread across regions like the American West, governments are increasingly turning to market-based allocation systems to manage shrinking supplies. Donna's work suggests they should proceed with caution. Financial inequality doesn't just affect who gets rich or poor—it can fundamentally break how markets work, directing scarce resources away from those who need them most.
"Markets can be a powerful tool," Donna said. "But when participants face financial constraints, markets do not necessarily allocate resources to the most productive users. They allocate them to whoever has the most cash on hand." The conditions that triggered market failure in Mula—scarcity driving up prices, widening the gap between those with capital and those without—are likely to intensify worldwide as competition for resources grows fiercer. Even as technology advances and algorithms shape modern markets, Donna warns the underlying problem persists: if access remains unequal, exclusion will follow.