Designing rights-based fisheries programs

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Tuesday, November 1, 2011

The evidence is in: Catch shares and other rights-based fisheries management programs work. They work on a number of dimensions—longer seasons, fresher product, more efficient use of fishing capital and labor, increased safety, and perhaps most importantly, the potential to halt or reverse worldwide trends in overfishing.

The benefits of a rights-based management (RBM) regime can be observed in the Bering Sea/Aleutian Island federal crab fisheries. In 2005, these fisheries converted to a RBM program. The two largest fisheries impacted by this regulation were the red king and snow crab fisheries. Participation in these fisheries peaked in 2004 with 229 boats fishing for red king and 173 boats fishing for snow crab.

The number of active vessels today has fallen to approximately 31 percent and 36 percent of their peak pre-RBM levels. Furthermore, the length of the season has increased considerably, relative to what it was during the pre-RBM period.

The contraction in the fishing fleet and extension of the season is a direct response to the altered incentive structure resulting from the transition to a RBM program. Those fishers who were more efficient at harvesting the resource remained in the fishery and purchased rights from the less efficient fishers.

My first experience with these fisheries came during a trip to Dutch Harbor, Alaska. The trip began by flying in the middle of blizzard to arrive at Unalaska Island. The captain landed twice along the way to refuel due to the excessive head winds, and the passengers were told that no more planes were going to be coming and going for some time. Although I spent much of the time vexing over the question of whether I would ever get home, the experience allowed me to spend plenty of time talking with boat captains and crew members.

Initially, I was solely focused on the efficiency gains that resulted from the transition of these fisheries to RBM programs. But after chatting with the local fishers I became more aware of the issues they faced; they spoke of the extra time they spent delivering crab to processors, the restrictions placed on the transferability of their quota, and concerns of quota consolidation. These discussions provided a firsthand account of the efficiency-versus-equity battle that often ensues in these environments and has prompted me to think more about the economic tradeoffs.

Efficiency versus Equity

Many economists have long been advocates of RBM programs for marine fisheries—especially if the rights are transferable and can flow to those individuals who value the resource the most. This system minimizes the costs of harvesting and fosters environmental stewardship—all while using market forces.

Rights-based management programs are now being used across the globe—approximately 25 percent of the total global fishery volume is executed under a RBM regime. But many of these programs do not act as precisely as economists—forever obsessed with efficiency—might wish. The rules and restrictions of each system vary widely and they are not based on the same economic principles (development of property rights to eliminate the racefor- fish) that motivated the need for RBM regimes. Other concerns, primarily about equity, are central to their design, and often manifest themselves in ways that may jeopardize the efficiency and appeal of rights-based fishery management.

The evolution of a RBM program can be best illustrated by analogy. Think of a fishery as a giant pie. Under the race-for-fish regime, the pie begins to shrink in size as more and more fishers adversely affect the long-term health of the resource. This competition is in and of itself an economically rational behavior, but it is not sustainable. The shrinking of the pie often motivates the creation of a RBM program. Once the program is created, the race to extract value from the fishery changes from one generated by a race-for-fish to a race-for-representation situation. This race-for-representation reflects the interest of the different constituents in mobilizing to increase their slice of the pie; a pie that will likely increase in size over time as the resource rebuilds.

The race-for-representation process is motivated by equity concerns among the different interest groups, but we often fail to acknowledge that catering to these interests comes at a cost to economic efficiency. Two common results from the race-for-representation are restrictions on the allocation and transferability of fishing rights, which often interact and compound to further restrict the rights. Allocation restrictions dictate to whom the rights of the resource are conveyed. The allocation of rights at the inception of a RBM program are predominately awarded to those individuals who have historically participated in the fishery, but the precise definition of “who” is not always transparent. The allocation of quota tends to come in accordance with where people fall on the continuum of organized interest groups. The best-represented individuals are those who can cost effectively organize to influence the creation of the RBM program.

The allocation rules following the implementation of a RBM program do not generate a direct loss in economic efficiency by themselves. If the rights are freely transferable and transaction costs are low, then the economic theory of Nobel laureate Ronald Coase predicts that an efficient allocation will still result. Therefore, from an efficiency standpoint, allocation restrictions are secondary to the transferability restrictions often contained in the implementation of a RBM program. When the transfer of rights is restricted, however, losses in economic efficiency may arise.

A well-structured property right must be enforceable, exclusive, and transferable. Generally RBM programs satisfy the enforceability and exclusivity requirement as they are backed by the issuing government and the returns from the right flow to the owner. But the transferability requirement is often violated following the initial allocation of the rights. These transfer restrictions are implemented to restrict the flow of resource value to specific groups within the fishery.

A large portion of the economic efficiency gains that are achievable following the transition to a RBM program, result from the consolidation of rights and the elimination of excess capacity, as has been observed in the Alaskan crab fisheries. It is possible, however, for a few firms to remain following this process. Often times this is thought of as inequitable and restrictions are put in place to prevent “over consolidation.” In the red king and snow crab fisheries there is a 1 percent consolidation rule that prevents any quota owner from possessing more than 1 percent of the total owner quota pool precisely for this reason—grandfathering exceptions aside.

Perhaps the most troubling efficiency-equity tradeoffs result when allocation and transferability restrictions interact. When the Alaskan crab fisheries transitioned to a RBM program, for example, rights were awarded to both the fishers and the processors participating within these fisheries. The processor rights dictate to whom, conventionally thought of as northern or southern processors, a fishers’ quota must be delivered. The pairing of these two rights restricts the transferability of shares because a northern share cannot be traded for a southern share. This restriction assures that the value of the fisheries will flow to the same regional communities and processors that have historically been impacted by these fisheries versus allowing a free market to establish the most efficient flow of resources. This approach further reduces the potential efficiency gains from a well-structured market.

Although it is easy for an economist to say that these restrictions compromise the efficiency gains achievable in a well functioning market, quantifying them is a less tractable problem. This is because we must be able to calculate what the “perfectly efficient” outcome would be in absence of the restrictions. As more research is conducted in this area we will be able to more definitively calculate these efficiency losses and determine when they do and do not compromise the objectives of the RBM program.

When policymakers decide to allocate rights under an RBM program, the allocation rules and subsequent transferability restrictions generate a restricted market. Currently, there is no RBM program that perfectly aligns with the economic theories used to rationalize their creation. This disjoint warrants further consideration.

An important question for fishery economists to answer is what is the magnitude of these different efficiency-equity tradeoffs and the resulting increased economic costs? If these tradeoffs are substantial, then efforts should be focused on ensuring that policymakers address them. If the tradeoffs are small, then perhaps the end justifies the means.

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Kurt Schnier is a professor of economics at the University of California, Merced, and a senior research fellow at PERC. Schnier received a B.S. in management sciences from the University of California at San Diego, an M.A. in environmental studies from the University of Pennsylvania, and his Ph.D. in economics from the University of Arizona. His...
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