Investment Booms and Natural Resources

We document a novel inefficiency of real investment booms: overinvestment can deplete scarce natural resources, like groundwater. Our empirical setting is the mid-2010s boom in California tree nuts and associated use of groundwater for irrigation. The boom is driven by late entrants, who, relative to other growers, grow on less-valuable land, have short holding periods, own a small share of the underlying aquifer, and are more likely to tap groundwater for irrigation. This suggests that late entrants do not internalize their impact on groundwater depletion. We find that areas more exposed to late entrants experienced substantially greater well drilling and sharper declines in groundwater levels. We estimate that overproduction by new entrants accounts for roughly one-fifth of the total decline in California groundwater levels between 2013 and 2023.

https://www.bschool.cuhk.edu.hk/events/investment-booms-and-natural-resources/