Excess water, I believe, will favor the acid/alcohol form. You need to be removing water from the equilibrium or doing something else to favor the ester over the acid.
That is unless there's something specially thermodynamically stable about lactones that causes them to be favored over open chain acids.
Although this is not good reasoning, the hydroxyacid is less available than the lactone. The hydroxyacids form lactones readily, see gamma-valerolactone in Wikipedia. I don't have any practical experience with delta-lactones, but as I understand, it is difficult to avoid lactonization upon acidification. I imagine an excess of mineral acid, even in water forms a lactone.
How is my reasoning, a simple Le Chatlier argument, not good? Typical esterifications using an alcohol and a carboxylic acid are not run in water because this will definitely make the equilibrium favor the acid form. As you know, esters and alcohols have about the same thermodynamic stability.
I knew there was something different about lactones which I acknowledged from the beginning. I just wasn't sure if it would be enough to make a difference here. Acylic versions of this reaction are not run in water and usually require removing water as the reaction proceeds or some other perturbation of the equilibrium.
Obviously Dan has run this reaction and now I'm remembering the fact that it is common knowledge among synthetic organic chemists that this particular type of esterification (lactonization) is particularly favored. I'm guessing now that it could simply due to entropic considerations.