Institutions (formal rules) governing water allocation and use are often critical to a nation's development and prosperity. It is often necessary to change water institutions as economic, physical and political circumstance change. In this paper, a framework is presented to help understand the potential and need for change in water institutions. The pressure for institutional change can be analyzed at the micro level, in terms of the incentives for individuals to organize in order to influence the structure of rules governing water. Economic incentives and interest-group politics combine to produce changes that may or may not be efficient. Change in water institutions can also be evaluated at the meso level, where the structure and sequencing of actual change is at issue. The concepts of nesting, path dependency and institutional transaction costs are particularly useful in understanding this level of change. The concepts presented can help economists evaluate the pressure for, and obstacles to, institutional change in a particular country. These insights may be used by those interested in adapting and designing water institutions that yield improvements in the use of water resources.