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Climate change is expected to increase the scarcity and variability of fresh water supplies in some regions with important implications for irrigated agriculture. By allowing for increased flexibility in response to scarcity and by incentivizing the allocation of water to higher value use, markets can play an important role in limiting the economic losses associated with droughts. Using data on water demand, the seniority of water rights, county agricultural reports, high-resolution data on cropping patterns, and agronomic estimates of crop water requirements, we estimate the benefits of market-based allocations of surface water for California’s Central Valley. Specifically, we estimate the value of irrigation water and compare the agricultural costs of water shortages under the existing legal framework and under an alternate system that allows for trading of water. We find that a more efficient allocation of curtailments could reduce the costs of water shortages by as much as $362 million dollars per year or 4.4% of the net agricultural revenue in California in expectation, implying that institutional and market reform may offer important opportunities for adaptation.

Because human and environmental systems in the Anthropocene are increasingly coupled, hydrologists and economists often find themselves studying the same systems from different vantage points. Here we argue that synthesis across economics and hydrology can help address two pressing sociohydrologic challenges: actionable prediction and the generation of transferable knowledge from place‐based studies. Specifically, we review (1) empirical methods and (2) theoretical approaches from economics and connect the two through a proposed iterative framework. First, we find that empirical methods for statistical analysis of natural and quasi‐experiments in economics can be leveraged to distinguish causal relations from mere correlations in complex and data scarce systems, which can help address the challenge of sociohydrologic prediction. Second, we find that economic theories based on rational choice can be used to decipher known paradoxes in water resources, which can help address the challenge of sociohydrologic knowledge generation. In both empirical and theoretical domains, specialized knowledge in hydrology remains critical to properly applying techniques from economics to coupled human‐water systems. We propose that linkages between the two fields highlight a large potential for interaction.