This article presents a model to help explain the transition path from one water management system to another, typically a commons framework to one of tradable permit-based property rights. Furthermore, drawing from transaction cost literature, the model demonstrates how this takes place when externalities (the strain on water resources) become severe enough to warrant the increased transaction costs inherent with more complex water rights management frameworks.JEL classifications: H410, K110, O110, O130, O423, Q15