The literature on policy diffusion has a strong spatial component, emphasizing the spread of policies to geographically proximate neighbors. Neighboring jurisdictions often share similar policy problems, however, making it difficult to disentangle policy diffusion from independent policy adoption in response to shared problem conditions. This project leverages data on local water use restrictions in Texas to examine processes of policy diffusion under varying conditions of problem severity. Most of the state has been in drought for the past three years, but local impacts of the drought vary according to the exogenous influence of local weather patterns and to features of a community’s water supply. We used a Freedom of Information Act request to obtain weekly data from the Texas Commission on Environmental Quality over the period 2010-2013 on self-reported severity of water systems’ supply conditions and the adoption of voluntary and mandatory usage restrictions. The state of Texas requires public water systems to produce drought contingency plans that identify trigger supply conditions for action by the system, including usage restrictions. However, the state allows water systems a great deal of freedom in choosing these trigger conditions for restrictions, as well as discretion in launching restrictions when the trigger level occurs. So, public water systems have the freedom to weigh the costs of imposing usage restrictions against the potential risk of running out of water. We combine the data on usage restrictions with GIS data on drought conditions, allowing us to examine local policy response to the emergence and rising severity of the drought while holding constant the sufficiency of a community’s water supply. Thus we are able to separately estimate the influence of problem severity and policy diffusion on local decisions to restrict water usage. We also use information about a community’s supply source to analyze how competition over a shared resource influences policy diffusion to neighboring jurisdictions. Our analysis includes relevant controls for community features and demographics, including measures of poverty and age of housing stock, as well as water system features, including water usage per connection and size of the system. Our findings shed light on the mechanisms of policy diffusion as well as the capacity of local governments to respond to the growing global challenge of water scarcity events.