This study takes a socio-ecological conflict in Petorca (Chile) as a reasonable example with which to discuss the facilitators and pitfalls of the transition towards sustainable water governance. It uncovers the mechanisms behind a market-based institutional structure that weakens trust between actors and impedes cooperation, and it analyses the ways in which social innovations overcome these mechanisms. Based on case study research with extensive qualitative interview analysis, this work contributes not only to the theoretical discourse on institutionalism and social innovations, but also to a broader discussion on sustainable water governance.