Distributional Effects of the Transition to Property
Rights for a Common Pool Resource⇤
Corbett Grainger† and Christopher Costello‡
May 28, 2015
Abstract
The introduction of property rights to manage common pool resources is often met with
opposition from some incumbent users, despite evidence of large aggregate increases in
resource rent. We introduce an analytical model with firm heterogeneity to distinguish
between traditional resource rent, which accrues to all owners, and inframarginal rent,
which accrues to those with high skill. We show that, in the presence of skill heterogeneity, some current users (namely those with the highest skill) may prefer common
pool management, despite large aggregate increases in rents due to rationalization.
Whether the transition to property rights is Pareto-improving hinges critically on the
initial allocation of rights, because inframarginal rents may be lower under property
rights than limited entry. In our application to an important US fishery, property rights
generate a ten-fold increase in market capitalization and a doubling in the present value
of the resource, but without substantial free grandfathering, the top harvesters would
rationally oppose the transition to property rights.
For helpful comments and suggestions, we thank seminar and conference participants at: Iowa State
University, California Workshop in Environmental and Resource Economics (UCSB), Institute Henri Poincare
(Paris), IRD (Sete, France), University of Washington, and LAMETA (Montpellier, France), Property and
Environment Research Center, and World Congress for Environmental and Resource Economics (Istanbul).
Thanks are due to Environmental Defense Fund, and in particular Ryan Ono, for supporting data collection.
†
Corresponding Author; Department of Agricultural & Applied Economics, University of Wisconsin Madison
‡
Bren School of Environmental Science and Management, University of California Santa Barbara; and
NBER
⇤
1
1
Introduction
Economists have long advocated the introduction of property rights to address problems
pervasive in common pool resources such as fisheries (Gordon 1954). Indeed, the global
trend with water, land, forests, fisheries, and other resources is toward greater privatization
of resources previously exploited in common, and there is a growing literature documenting
gains in aggregate welfare arising from the implementation of property rights. Despite this
body of evidence, proposed property rights regimes are often opposed by some incumbent
resource users. The main purpose of this paper is to examine the distributional effects of
a transition to property rights for a common pool resource. The crux of our thesis aligns
with arguments introduced previously by Karpoff (1987) and Johnson and Libecap (1982):
Even if aggregate benefits are large, some incumbents may rationally oppose the change if
they were particularly skillful in capturing rent in the common property regime. Thus, an
interesting and understudied feature of institutional reform, and the one we focus on here,
is the distribution of rent among resource users before, and after, the transition to property
rights for a common pool resource.
The literature has focused on aggregate increases in rent due to property rights management. But whether an individual resource user will benefit or lose under property rights will
hinge on the rent accruing to high skill in the absence of property rights. Heterogeneity in
skill across resource users gives rise to inframarginal rent1 in the common property regime,
which may be subsequently transferred to other users or capitalized into asset values when
property rights are introduced. Incumbent resource users with high skill may earn large
inframarginal rent in the common property setting. This is consistent with Deacon et al.
(2013), who document that the top harvesters opposed rights-based management in a prominent Alaskan salmon fishery (in that case, forming a cooperative). Even if the efficiency gains
under property rights will increase the overall “size of the pie,” the rent captured by such
an individual may decrease under property rights. Lump-sum transfers to such individuals,
usually in the form of grandfathered access to the resource, can be designed to overcome this
hurdle. For example, to ensure reform without losers (i.e. Pareto improving institutional
change), or to gain the political support of a critical mass of incumbent resource users, the
allocation of rights must compensate high-skill incumbents for the changes in rent associated
with the introduction of property rights. In this paper, we develop an analytical model to
separate resource rent from inframarginal rent under alternative management regimes. We
show how differences in skill lead to inframarginal rent, which may be large under the common pool regime. We then apply the framework to calculate, under the model’s assumptions,
the magnitude and distribution of these rents before and after the adoption of property rights
across users in an important U.S. fishery.
Calculating firm-level inframarginal rent requires a model with firm-level heterogeneity.
Our model consists of a fixed set of firms with heterogeneous skill; the model is consistent
with earlier contributions by Karpoff (1987) and Homans and Wilen (2005), though those
authors did not explicitly treat heterogeneity. In our model, each firm begins the period
with a capital decision that determines its effective level of extraction effort. This affects its
1
Throughout this paper we refer to “inframarginal rent” as the rent arising from heterogeneity in marginal
extraction costs. This could alternatively be referred to as “racing rent,” “skill rent,” or following Anderson
(1989) as “highliner rent.”
2
harvests and costs, others’ harvests and costs, and ultimately the season length chosen by
a regulator. This illustrates the overcapitalization and “racing” conditions that characterize
many common pool resources, including fisheries regulated with limited entry. That basic
apparatus allows us to calculate resource rent and firm-level inframarginal rent under both
the common property regime and the property right regime. These results allow us to
derive several conclusions about the distributional effects of the transition to property rights.
Among other results, we derive conditions under which individual firms would rationally favor
(or oppose) a transition to property rights as a function that firm’s share of harvest in the
common property regime and the grandfathered allocation to that firm. Because the cost
structure often changes after a transition to property rights, we also derive the effects of this
change on asset values, the distribution of rent, and the overall value of the resource. In so
doing, we uncover an interesting tension between inframarginal and resource rent. We find
that the transition to property rights can have important distributional effects by transferring
inframarginal rent (under Common Property) into resource rent (under Property Rights).
More generally, by assigning property rights in a common pool resource, the inframarginal
rent enjoyed by resource users with high skill (or alternatively low marginal extraction costs)
may, upon the transition to property rights, be capitalized into asset values and transferred
to other asset owners. The introduction of property rights effectively levels the playing field
across all resource owners, transferring some of the inframarginal rent (which accrued to
harvesters who succeeded in racing to capture inframarginal rent) to resource rent (which
accrues to all owners).
Our analytical results shed new light on the political economy of the transition to rights
based management of natural resources. In addition to the general insights that emerge out
of the analytical model, we show how the model can be readily applied to aggregate data
to generate two kinds of results. First, we calculate the firm-level inframarginal rent before
and after the transition to property rights in the Gulf of Mexico Red Snapper fishery, which
adopted an individual transferable quota (ITQ) in 2007. This allows us to examine for a
range of grandfathering policies, whether individual fishermen would rationally oppose the
transition to ITQs. Second, recognizing that the value of the fishery is simply the sum (across
fishermen) of inframarginal rent plus resource rent, we can achieve a back-of-the-envelope
estimate of the aggregate value of the fishery in the common property regime and in the
property rights regime. This second contribution illustrates how simple market-level data
can be used to examine the aggregate welfare effects of a transition to property rights.
The results suggest that whether the transition to ITQs in the Red Snapper fishery
disadvantaged some incumbents depends on the manner in which rights were allocated. In
reality, 100% of rights were freely allocated to incumbents - both our theory and empirical
results suggest that this was sufficiently generous to render the transition beneficial for all
incumbents.2 But our model also provides a straightforward calculation of the distributional
effects under alternative allocation formulae. While Anderson et al. (2010) argue for full
grandfathering on efficiency grounds, we derive conditions under which high-skill individuals
2
Aside from the proportion grandfathered, which will be our focus in this paper, another challenge facing
the regulator is to determine the historical window that will serve as the baseline for the initial allocation.
Each fisherman has an incentive to lobby for a baseline year (or set of years) that is favorable to himself.
Since harvest in our model is deterministic, we can abstract away from year-to-year fluctuations in harvest
for an individual.
3
would rationally oppose property rights. We find that if less than one-third of the rights
were freely allocated, high-skill fishermen would have rationally opposed the transition to
ITQs.
Our model results also provide an estimate of the change in aggregate fishery value from
adopting ITQs. Few such estimates exist in the literature (the seminal paper is Grafton
et al. (2000)) because previous authors have relied on hard-to-come-by micro-level data to
estimate stochastic production frontiers. Our approach is wholly different - we rely only on
annual market-level outcomes (permit trading prices under Common Property and quota
share prices under ITQs), average ex-vessel prices, and the distribution of harvest. Our
estimates suggest a doubling in aggregate value of the fishery due to ITQs, and nearly a
ten-fold increase in market capitalization.
1.1
Fisheries Background
While we regard our analytical model and conclusions as potentially applicable across a range
of natural resources, our central focus is on fisheries. Here we provide a short background
on fisheries and the transition to property rights. Over the past three decades, hundreds of
prominent fisheries have followed the lead of forests, minerals, and other natural resources
and have transitioned from common pool arrangements to individual property rights. A
comprehensive global database recently estimates that there are 647 different rights-based
management programs (such as ITQs) in a total of 17 countries (Environmental Defense
Fund 2014).3 These fisheries represent about 25% of global fish landings (Arnason 2012), and
adoption is increasing rapidly. The transition to ITQs is almost always preceded by a system
called “Limited Entry,” under which a fisherman owns a permit entitling him to participate in
the fishery, and the fishery regulator employs other tools (typically limiting season length) to
constrain the catch. Under Limited Entry, permits are generally transferable, and the market
permit price reflects capitalized profitability to the marginal fisherman. Under ITQs, shares
of the allowable catch are transferable, and the market price of a quota share reflects the
profitability of a marginal unit of harvest. Market prices under both regimes4 are generally
available to researchers; one of our contributions is to show that when combined with other
relevant variables, this information can be used to examine the aggregate economic effects
of the transition from Limited Entry to ITQs.
Switching from Limited Entry, where participants have strong incentives to race to capture the largest share possible, to an ITQ, where efficiency in harvest can be restored, may
also have important distributional consequences; this is the main focus of our paper. The
allocation of rights upon the switch to ITQs, which amounts to a lump sum transfer, also
has important distributional effects, and may determine whether any individual fisherman
will expect to be advantaged or disadvantaged from the transition. In practice, initial rights
in an ITQ are almost always grandfathered for free to incumbent users.5 Typically a histor3
This includes well-known examples in the US, New Zealand, Canada, Iceland, etc. as well as lesserknown examples in, e.g., Namibia, Cook Islands, Estonia, and South Africa. We know of only one fishery
world-wide, a sea cucumber fishery in Ecuador, that adopted an ITQ and later reneged it.
4
Under limited entry, we observe the market price of a permit; under ITQs, we observe the market price
of a quota share.
5
The Red Snapper fishery we study adopted this approach.
4
ical window (e.g. five years) defines each fisherman’s share of catch and new and potential
entrants are excluded from the allocation.6 In some instances quota banks or communities
receive allocations to distribute, over time, to new entrants.7 And in other cases, a fraction
of the quota is allocated equally across all incumbents and the remainder is allocated in
proportion to historical catch.8 Whatever the formula, the initial allocation, combined with
the allocative effects of the institutional change, define the distributional consequences of a
shift to ITQs. The main focus of this paper is to examine how rent accrues to individuals as
a consequence of resource scarcity (resource rent), fisherman skill (inframarginal rent), and
the free allocation of rights (grandfathering). This lends insight into, and provides specific
predictions about, the political economy of the transition to property rights over a natural
resource.
We also contribute by deriving a model that can be brought to data to estimate the
aggregate value of the fishery before and after the transition to ITQs using market-level data.
Estimating the aggregate economic gain from a transition to property rights is regarded as a
difficult task due to onerous data requirements, and despite the colloquial belief that these
gains are large, few empirical studies have been undertaken. Previous studies have assembled
time series of detailed microdata to estimate firm-level costs and revenues before and after
rationalization; they generally point to large gains from the introduction of property rights
(Grafton et al. 2000; Lian et al. 2009).9 A tempting alternative, which would make use
of only market data, would be to simply calculate the market capitalization: The market
permit price times the number of permits (before the transition) and the ITQ quota price
times the number of quota shares (after the transition). This simple calculation is critically
flawed because it ignores inframarginal rent and effectively assumes that all fishermen are
of equal skill, in which case there would be no distributional effects to explore. Under this
assumption, we would expect the same behavior among all fishermen (e.g. the same level of
harvest every year), and all fishermen would be equally advantaged, or disadvantaged from
the transition to ITQs. We will show that this calculation correctly estimates the change in
resource rent; we augment it with a calculation of firm-level inframarginal rent. The sum of
the two is the aggregate value of the fishery.
Perhaps most poignantly, the market permit price in a Limited Entry system does not
fully reflect the present value of access to every fisherman to the fishery; it reflects only
profitability to the marginal fisherman. The value of a permit to the most skilled fisherman
could be significantly higher, depending on the degree of heterogeneity within the fishery. In
these cases, inframarginal rent accrues to the permit-holders with high skill. In our model,
higher-skill fishermen harvest the most and earn the highest inframarginal rent under Limited
Entry. Thus firm-level heterogeneity is critical in determining the value of the inframarginal
rent, as well as the overall value of the resource, prior to the implementation of property
6
The allocation window is generally historical to avoid creating perverse incentives such as a race for
initial allocation.
7
For example, several Alaskan fisheries have adopted this approach, as did the New England sector
allocation (Holland et al. 2013).
8
For example, the West Coast Groundfish Fishery adopted this approach.
9
Reimer et al. (2014) examine the multiple margins of rent generation in the Bering Sea Red King Crab
fishery. They focus on the difference in the intensive versus extensive margins, but because their model
assumes a homogeneous fleet, there is no additional rent to high-skill individuals.
5
rights. But skill is also important in an ITQ; the present value of the fishery is higher than
the aggregate value of quota shares would suggest. So, the analysis will require separately
calculating inframarginal rent and resource rent under both Limited Entry and ITQs.
Earlier authors, such as Copes (1970), Johnson and Libecap (1982), and Karpoff (1987)
point to the potential importance of inframarginal rent in the presence of heterogeneous
fishing firms. Coglan and Pascoe (1999) indicate the importance of measuring profits, not
just resource rent, using survey data. And Johnson (1995) points to the importance of rent
beyond pure resource rent in his model of taxation in fisheries. We build on this foundation
by constructing an analytical model with heterogeneous fishermen that we use to compare
welfare and distributional outcomes under alternative management regimes. This allows
us to examine many real-world concerns raised by incumbents and potential entrants when
considering the implementation of ITQs, and to inform the initial allocation and historical
rents in the design of property rights systems.
2
Heterogeneous Firms and the Transition to Property
Rights
We model a fishery that is initially managed as common property and then transitions to
individual property rights. In the commons, we assume the most prevalent form of fisheries
management in the western world, the Limited Entry system. To participate in a Limited
Entry fishery, a fisherman must own one of a fixed number of permits, which are bought
and sold in a permit market. This entitles the fisherman to harvest any amount of fish
during the open fishing season, whose length is adjusted by a regulator to ensure that the
overall quota is met but not exceeded. Importantly, this system grants access to the fishery
but does not grant individual rights to levels of harvest. We then model the same fishery
under property rights-based management. We model the most common form globally, the
Individual Transferable Quota (ITQ), which does not limit the number of participants and
generally does not require a permit. Rather, individual levels of catch (more precisely,
individual fractions of the total allowable catch) are bought and sold in a quota share market
(see Newell et al. (2005) for a synposis of the function of such markets). Our model captures
outcomes under both systems, paying particular attention to the individual, fisherman-level
economic effects of the two management regimes.
In this analytical model we abstract away from transition dynamics such as fishery recovery; these nuances are treated elsewhere in the literature (Homans and Wilen 2005; Lian
et al. 2009; Schnier 2009). Instead, we are most interested in the role of heterogeneity in
determining the capture and distribution of rent under the two alternative forms of management. Our goal is to separate analytically the rent that accrues to individuals as a result
of fishing skill versus the rent that accrues equally to all owners of the scarce resource. In
so doing, we will be able to characterize the important properties of the distributional consequences of switching from common pool to property rights management of a renewable
natural resource.
6
2.1
Behavior and Technologies
We assume that each of N heterogeneous fishermen is endowed with innate skill (indicated
by ↵i for fisherman i), and we will derive the behavior of each fisherman under Limited Entry
and ITQs. Fisherman i begins the season by choosing an input, which we call fishing capital,
ki , that ultimately determines his rate of harvest, taking as given the season length, T , and
other individuals’ decisions.10 Higher levels of ki are costly to the fisherman but ensure a
larger harvest rate. The choice of ki is made simultaneously by all fishermen, each of which
takes k i and season length T as given. Harvest by fisherman i is given by:
h i = ↵ i ki T X
(1)
where X is the fish stock. Here, the term ↵i ki T is interpreted as i’s effective fishing effort.
This is similar to how Karpoff (1987) and Homans and Wilen (2005)11 model the harvest
technology and harkens back to the simplest bioeconomic models for which harvest is bilinear
in stock and fishing effort (Clark 1990), though our model allows for firm-level heterogeneity.
The season length, T , which is taken as given by individual fishermen, is chosen by the
regulator to ensure that the desired quota, Q is met but not exceeded. Since harvest is
deterministic in our model, the season length
can be set at the beginning of the season. The
h⇤
regulator in this case would set T = ⌃i ↵i kii X , where h⇤i is i’s equilibrium harvest.
2.2
Common Property Management: “Limited Entry”
We now apply this basic setup to a fishery managed with Limited Entry, where a hat over
a parameter or variable indicates the Limited Entry regime. A total of N = N̂ permits
are made available by the regulator. Owning a permit guarantees access to the fishery, but
conveys no particular right to a share of the overall harvest. Fisherman i takes season length
T = T̂ and others’ capital choices as given and seeks to maximize his own annual profits by
choosing capital.12 The market (ex-vessel) price for fish is given exogenously13 by p = p̂ and
costs depend on the choice of capital. Profit to fisherman i is:
⇡
ˆi = p̂hi
ĉki2
(2)
Fisherman i chooses ki to maximize her profit. Substituting for harvest and differentiating
with respect to capital, the first-order condition (assuming an interior solution) gives the
10
For example, the capital decision might vessel size as well as the associated number of crew.
Homans and Wilen (2005) adopt the harvest function h = qEX, where q is the catchability coefficient,
E is effort, and X is the stock. In our model, individuals vary in skill, and individual i ’s “effective effort” is
a product of his individual skill parameter, ↵i , his capital decision, ki , and the season length. Their model
focuses on dynamics under limited entry, while our focus is on heterogeneity within a season. We note that
the comparative statics of equilibrium in their model fit closely to the comparative statics in our model.
12
We abstract away from dynamics in this model to illustrate the role of heterogeneity in determining
inframarginal rent. This capital investment decision could be thought of as a capital rental decision, because
there is no accrual or depreciation in the model.
13
This assumption could be relaxed, for example if the fishery supplied a small local market, as long as
fishermen do not believe they can impact the ex-vessel price and all fishermen face the same price within a
season.
11
7
optimal capital input, which implies an optimal harvest for fisherman i of:
p̂(ˆ
↵i T̂ X̂)2
(3)
2ĉ
This suggests that in equilibrium under Limited Entry, high-skill fishermen harvest more
than low-skill fishermen, and that any fisherman will harvest more if price rises, the resource
stock increases, the season is longer, or the costs of capital decrease. Aggregate harvest is
P
just the sum N̂
i=1 ĥi .
As in Homans and Wilen (2005), the regulator, who desires a total harvest of Q̂, sets the
season length accordingly. Our expression for season length is given by
v
u
u
2ĉQ̂
T̂ = t
,
(4)
P
2
p̂X̂ 2 N̂
↵
ˆ
j=1 j
ĥi =
which implies that the regulator must shorten the season as skill levels and prices rise, or as
costs or the desired quota fall. Taking this decision into account, the share of catch captured
by fisherman i over the entire fishing season under Limited Entry, is:
↵
ˆ2
ˆi ⌘ P i
N̂
ˆ j2
j=1 ↵
.
(5)
Substituting gives the simple expression for profit to fisherman i:
p̂ˆi Q̂
p̂ĥi
=
.
(6)
2
2
Equations 5 and 6 suggest a straightforward linkage between a fisherman’s skill, harvest, and
profit: Fishermen with high skill harvest more fish and earn greater profit. The converse
is also true: Fishermen with high harvest can be interpreted as having high skill and high
profit. This will become particularly useful in the empirical example, in which we observe
each fisherman’s harvest from which we can then derive her skill and profit.
It will become convenient to rank fishermen by decreasing skill, so fisherman N̂ is the
lowest-skill fisherman under Limited Entry. Invoking Equation 6, such a fisherman earns
profit ⇡
ˆN̂ = p̂ĥN̂ /2. Fisherman N̂ ’s profit plays an important role in a Limited Entry
fishery: it determines the market permit price.14 A potential entrant willing to pay at least
⇡
ˆN̂ could successfully enter, but a potential entrant willing to pay less than ⇡
ˆN̂ could not,
15
so ⇡
ˆN̂ gives the equilibrium market permit price under Limited Entry.
Each incumbent fisherman under Limited Entry earns two types of rent. First, the
scarcity of permits gives rise to a resource rent that is simply the market value of the
permit, ⇡
ˆN̂ . This resource rent is the same across all fishermen because the market value of
a permit in Limited Entry is independent of one’s skill. Second, higher-than-marginal skill
gives rise to inframarginal rent that is simply the profit fishermen i earns above and beyond
the market value of her permit. We summarize these findings in the following proposition:
⇡
ˆi =
14
This is the rental rate for a permit for a single season; the sales price for use in perpetuity is simply
⇡
ˆN̂ (1 + r)/r.
15
For simplicity we assume that a person identical to the marginal fisherman would enter the fishery, so
that the market price exactly reflects profitability of the resource for the marginal fisherman.
8
Proposition 1. Under Limited Entry, fisherman i earns the following single-period rent:
• Resource Rent: v̂0 = ⇡
ˆN̂ =
• Inframarginal Rent: v̂1 =
p̂ĥN̂
2
p̂(ĥi ĥN̂ )
2
Note here that resource rent, which accrues equally to all incumbents, depends only on
the profitability of the lowest-skill incumbent. This suggests that fisheries with greater skill
heterogeneity will, ceteris paribus, have lower resource rent. To the contrary, inframarginal
rent to fisherman i depends on i’s harvest (via her skill) relative to that of the low-skill
incumbent. This suggests that fleets with greater harvest heterogeneity under Limited Entry
will have higher inframarginal rents, particularly to the high-liner fishermen (those with high
skill and thus high harvest). Thus, in an intuitive sense, this model predicts that fisheries with
greater harvest heterogeneity are likely to have higher inframarginal rents, and lower resource
rents, than fisheries with low skill heterogeneity. Indeed, in a completely homogeneous
fishery, inframarginal rents vanish and the entire value of the fishery is captured by resource
rent. But the opposite case is also possible. In a highly heterogeneous fishery, resource rent
(and thus, permit price) can be driven arbitrarily close to zero, while inframarginal rent
accruing to the high-skill fishermen can be arbitrarily large (bounded only by the ex-vessel
value of total harvest). In such cases, the entire value of the fishery is driven by inframarginal
rent. We suspect that empirically, most fisheries fall somewhere between these extremes. In
the Red Snapper fishery we later study, we estimate that 80% of the fishery value under
Limited Entry is due to inframarginal rent, and only 20% is due to resource rent.16
2.3
Property Rights Management: “ITQs”
We next examine the behavioral and distributional consequences of switching from Limited
Entry to ITQs. We indicate the ITQ regime with a tilde over the relevant parameters
and variables. Even if the same overall quota is targeted by the regulator, management by
ITQs differs substantially from Limited Entry management. Under ITQs, the total allowable
catch quota (Q̃) is set by the regulator and fishermen exchange shares of that quota in a
market; they are no longer required to hold a permit.17 The market price for fish (p̃), cost
parameter (c̃), and skill endowments (˜
↵i ) may differ under ITQs as a consequence of increases
in fleet efficiency, differences in capital required, changes in harvested fish quality, etc.18 The
number of fishermen under ITQs is unconstrained, so Ñ 7 N̂ , though most fisheries find
that adopting ITQs leads to some fleet consolidation, so Ñ < N̂ .19
16
The rents earned by fisherman i in Proposition 1 are expressed for a single period. If the fishery is
in steady state, so all incumbents expect to earn the same rent year-after-year, then the present value of
resource and inframarginal rents to fisherman i are simply V̂0 = (1+1/r)v̂0 and V̂1 = (1+1/r)v̂1 , respectively.
Finally, the present value of the fishery under Limited Entry is the sum: V̂0 + V̂1 .
17
Recall, under Limited Entry, that the only reason fishermen were required to hold a permit was to
restrict total catch within the allowed season. Under ITQs, catch is regulated and monitored directly.
18
There is substantial evidence that p̃ > p̄ (due to product quality) and c̃ < c̄ (due to technological
efficiency). In our empirical example below, price under ITQs rises by about 40%.
19
In our case study, the fleet reduces by about 35%.
9
Even without changes to parameters such as price and cost, behavioral incentives change
significantly under an ITQ. Rather than buying a permit that entitles a fisherman to participate in the race to fish, a fisherman under ITQs must implicitly pay a “tax” on every
fish landed. Like all cap and trade programs, the “tax” is the lease price of quota, which we
denote by ⌧ , so the net price received by a fisherman is p̃ ⌧ . Capital decisions, harvests,
and the fishing season length will all adjust accordingly. Fisherman i takes the underlying
resource stock X̃ and season length T̃ as given and maximizes profit, resulting in a harvest
of:
(p̃ ⌧ )(˜
↵i T̃ X̃)2
h̃i =
.
(7)
2c̃
Simple manipulation of Equation 7 also reveals that the share of harvest captured by fisherman i is, once again, a simple function of fisherman i’s skill relative to others’ skill:
↵
˜ i2
˜i = P
Ñ
j=1
↵
˜ j2
.
(8)
If the skill distribution and fleet size is unchanged after ITQs, then fisherman i’s share of
the catch under ITQs will be identical to her share under Limited Entry.
Though fishermen take the quota lease price (⌧ ) as given, it is determined endogenously
in the model as ITQ shares are traded. Given any season length T̃ , we can find the quota
price that closes the model - i.e. the value of ⌧ such that exactly Q̃ fish are harvested during
the fishing season. In our model, for a given quota under ITQs, the value of the fishery is
increasing in the season length. Thus, relaxing the season length constraint maximizes the
value of the resource, so the regulator will set T̃ = T̄ , the maximum season length possible
(e.g. the entire year).20 When the total allowable catch is Q̃, the resulting equilibrium quota
price is:
2c̃Q̃
⌧ = p̃
.
(9)
P
2
(T̄ X̃)2 Ñ
↵
˜
j=1 j
Equation 9 suggests that the quota share lease price under ITQs is increasing in fish price,
season length, fish stock, and fleet-wide fishing skill; it is decreasing in the cost of capital and
in the overall fishing quota. These predictions accord with economic intuition and with the
little empirical evidence that exists. Under ITQs, resource rent accrues due to scarce fishing
quota; it is just ⌧ per unit harvest. Inframarginal rent to fisherman i is a consequence of
high skill. Substituting the optimal capital choice and endogenously-determined lease price
gives expressions for the resource and inframarginal rent, earned by fisherman i, as follows:
Proposition 2. Under ITQs, fisherman i earns the following single-period rent:
• Resource Rent: ṽ0 = ⌧ h̃i
• Inframarginal Rent: ṽ1 =
(p̃ ⌧ )h̃i
2
20
Indeed, Grafton et al. (2000) and others have documented substantial increases in the season length
when the incentive to race is removed. We assume that the regulator sets the season length so that costs
can be minimized for commercial fishermen.
10
The effects of heterogeneity on rent capture under ITQs are markedly different than the
effects under Limited Entry. Under Limited Entry, increasing fleet heterogeneity decreased
resource rent and increased inframarginal rent. Under ITQs, the quota share price is unambiguously increasing in skill heterogeneity (see the denominator of Equation 9, and consider a
mean-preserving spread). This also implies that fleet-wide resource rent is increasing in skill
heterogeneity. In contrast, fleet-wide inframarginal rent is decreasing in skill heterogeneity
(fleet-wide inframarginal rent is Q̃(p̃ ⌧ )/2). These results are in stark contrast to those
under Limited Entry, and suggest, for very heterogeneous fishing fleets, that a transition
from Limited Entry to ITQs will transfer large inframarginal rents (under Limited Entry)
into large resource rents (under ITQs).
2.4
Aggregate Fishery Value
The main purpose of this paper is to examine the distributional consequences of the transition
to property rights for a common property resource. But a secondary objective, which our
model is amenable to achieving, is to estimate the aggregate value of the resource before,
and after the transition. Applying such calculations empirically would allow us to estimate
the aggregate welfare effects of adopting property rights in natural resources. The model
above can immediately be used to make these calculations. Propositions 1 and 2 provide the
fisherman-i, single-period resource and inframarginal rents, which depend on the distribution
of skill in the fishery. And since skill maps one-to-one with harvest in our model, and we
generally observe harvest (but not skill), we can use the distribution of harvest in the Limited
Entry fishery and in the ITQ fishery to estimate these fisherman-specific rents (see below).
To aggregate to total fishery value, we need to sum over fishermen in the entire fleet, sum
the two kinds of rent, and we need to take present values. These results are summarized as
follows:
Proposition 3. Assuming a steady state, total present value of the fishery is:
✓
◆
1 + r p̂Q̂
V̂ =
Under Limited Entry
r
2
✓
◆
1 + r (p̃ + ⌧ )Q̃
Ṽ =
Under ITQs
r
2
(10)
(11)
We will use Proposition 3 in the empirical example to estimate the change in aggregate
value of the fishery following the transition to ITQs. A straightforward special case is when
p̂ = p̃ and Q̂ = Q̃, in which case it is obvious that Ṽ > V̂ . In that case, the aggregate fishery
value increases as a result of ITQs by the quantity ⌧ Q̃/2. Invoking Proposition 2, this
increase in value is therefore increasing in skill heterogeneity - a more heterogeneous fishery
is likely to gain more in aggregate fishery value than a more homogeneous fishery.21 Because
the ITQ share value (⌧ ) is decreasing in fishing cost (c̃), the aggregate increase in the value of
the fishery under ITQs is also decreasing in c̃: the more efficient is the fishery at harvesting,
the larger will be the gain from the transition to ITQs. While these results strongly suggest
that the aggregate fishery value will increase under ITQs, they do not immediately address
21
Though even a relatively homogeneous fishery is expected to gain under ITQs because ⌧ > 0.
11
the question of the distributional impacts of that transition. We address this issue in the
next section.
3
Distributional Consequences of the Transition
In this section we focus on the individual-fisherman welfare effects of the transition from
Limited Entry to ITQs. Because we are interested in the distributional consequences to
incumbent fishermen, we assume that fisherman i currently owns a permit entitling him to
participate in the Limited Entry fishery.22 Then, to transition to ITQs, the quota share
rights must be distributed in some manner. We will assume that some fraction of the rights
are given away for free to the incumbent fishermen, and that the remainder are sold to
fishermen. For any such formula, we will calculate who buys, who sells, and ultimately what
the welfare effects are on all fishermen. We will show that whether any particular incumbent
expects to benefit, or lose, from ITQs will hinge critically on the free allocation formula.
3.1
Free Allocation and Welfare
We begin by comparing welfare for individuals under Limited Entry and ITQs to determine
the distributional consequences of the transition to ITQs. Our results from Section 2.3 suggest that the more heterogeneity in a fishery, the more its value is driven by inframarginal
rent under Limited Entry, and by resource rent under ITQs. But resource rent under ITQs
is nothing more than the ITQ share price. Thus, freely allocating shares in an ITQ fishery
is equivalent to freely allocating resource rent. In the extreme where all shares are freely
allocated, incumbent fishermen (to whom the rights are freely allocated) capture the full
resource rent. Conversely, requiring fishermen to purchase shares in an ITQ fishery is equivalent to making fishermen pay for resource rent. In the extreme when no shares are freely
allocated, the government regulator captures all resource rent. In either case, fishermen
capture the full inframarginal rent, though inframarginal rent is likely to be a small part of
total fishery value for highly heterogeneous ITQ fisheries (see Section 2.3).
We will begin by deriving a formula that characterizes the change in welfare for any
arbitrary incumbent fisherman when the fishery transitions from Limited Entry to ITQs. As
discussed above, this will depend on the allocation formula. We then examine closely the
special cases of complete grandfathering (in which all rights are freely allocated to incumbents) and no free allocation. We conclude by calculating, for any fisherman, the level of
free allocation that would be required to render the transition to ITQs welfare-improving,
and then consider the distributional impacts to new potential entrants.
It is common for the free allocation of ITQ shares to fisherman i to be granted as a
fraction, i , of her historical share of catch (relative to some baseline period). In that case,
fisherman i would receive a total free harvest allocation of i ĥi . For example, if i = 0.6
then fisherman i receives a free allocation that is 60% of her historical catch under Limited
Entry. The market value of this free allocation is i ⌧ ĥi , so i can also be interpreted as the
fraction of i’s historical resource rent that is freely allocated under ITQs. For any value of i
22
Potential new entrants to the fishery will be treated explicitly at the end of this section.
12
to fisherman i, we can directly calculate the welfare gain to fisherman i from the transition
to ITQs, as follows:
LE!IT Q
|
i
i
=
(p̃
|
⌧ )h̃i
2 }
{z
+
Inframarginal Rent under ITQs
p̂ĥi
2
|{z}
i ⌧ ĥi
| {z }
Free Allocation under ITQs
(12)
Profit under Limited Entry
Given a free allocation parameter for fisherman i, i , if i > 0, then the fisherman prefers
ITQs and if i < 0, then she prefers Limited Entry. The first and third terms of Equation 12
are independent of i , and the second term is clearly increasing in i , so dd ii > 0: Larger free
allocations give greater preference to ITQs over Limited Entry. While we have allowed all
parameters to possibly change after the transition to ITQs, this level of generality makes it
difficult to dissect the cases under which i 7 0. In addition to larger grandfathered shares,
whether an individual is positively impacted by ITQs depends on the extent to which costs
decrease and the degree of heterogeneity in skill (both of which, in turn, affect ⌧ ). To the
extent that there is consolidation, one would expect Ñ > N̂ , and a price premium may arise
as the timing of harvest could change. For analytical traction, we consider the following
special case in which parameters are unchanged following the transition, recognizing that
there are other special cases that could be considered in turn:
Condition 1. p̃ = p̂ = p, h̃i = ĥi = hi , and Ñ = N̂ = N .
Condition 1 provides a straightforward comparison for the welfare effects of ITQs on any
given fisherman, which we summarize below:
LE!IT Q
i
Proposition 4. Under Condition 1,
> 0 if and only if
i
> 0.5.
The proof of Proposition 4 is easily obtained by substituting the parameters from Condition 1
into Equation 12. Under Condition 1, if at least half of a fisherman’s historical share of catch
is freely allocated, then she will be a net winner under ITQs. If output prices increase under
ITQs (p̃ > p̂), then the required free allocation is even smaller. Of the hundreds of ITQs we
know of globally, all have freely allocated rights in a manner consistent with Proposition 4.
Indeed, many allocate i ⇡ 1, in which case we expect all incumbent fishermen to benefit
substantially from ITQs. We now examine several special cases of the allocation formula.
3.2
Special Case #1: Complete Grandfathering
Perhaps the most common method of allocating rights in an ITQ fishery is to freely grandfather all quota shares to incumbent fishermen in proportion to their historical shares of catch
(so i = 1 for all i). Proposition 4 suggests that any incumbent will benefit from ITQs under
complete grandfathering.23 The following corollary describes the net benefit to fisherman i
under complete grandfathering:
Corollary 1. Under complete grandfathering, fisherman i’s benefit under ITQs is:
i|
23
i =1
=
(p̃
⌧ )h̃i
(p̂
2⌧ )ĥi
2
This is certainly true under Condition 1, and is likely to be true even without it.
13
(13)
And under Condition 1, this becomes:
⌧ hi
(14)
2
Corollary 1 provides a simple means of calculating the gain to a fisherman under ITQs,
provided that all rights are freely allocated. The gain is proportional to fisherman i’s harvest:
A fisherman with twice the historical catch is expected to gain twice as much under ITQs.
i|
3.3
i =1
=
Special Case #2: No Free Allocation
At the other extreme, the initial rights under ITQs could be sold by the regulator; this would
generate government revenue and would not confer any particular advantage to historical
participants in the fishery. In the popular debate over common property vs. property rights,
it is commonly argued that public trust resources such as fisheries should never be allocated
for free (Bromley 2009). This mirrors an initial public offering of a publicly traded company:
shares of catch would be initially offered at price ⌧ , and would subsequently be traded in the
ITQ quota market. We can employ Equation 12 evaluated at i = 0 to examine the welfare
effects under zero free allocation. We summarize the result as follows:
Corollary 2. Under no free allocation, fisherman i’s benefit under ITQs is:
i|
i =0
=
(p̃
⌧ )h̃i
2
p̂ĥi
(15)
And under Condition 1, this becomes:
⌧ hi
(16)
2
Equation 16 states that under Condition 1, and with no free allocation, every single
incumbent fishermen will lose under ITQs. The larger her harvest, the more she stands to
lose. Furthermore, since ⌧ is increasing in fleet heterogeneity, the losses from ITQs (under no
free allocation) will be largest for very heterogeneous fleets. The result in Corollary 2 is in
stark contrast to that in Corollary 1. When ITQ rights are freely allocated, everyone benefits,
but when fishermen are required to purchase their own ITQ rights, nobody benefits.2425 This
seems to suggest that if a sufficiently large percentage of rights are freely allocated, any
fisherman can be made better off under ITQs; we address this suggestion below.
i|
3.4
i =0
=
Special Case #3: Minimum Pareto Improving Allocation
In our model, heterogeneous skill drives heterogeneity in the welfare effects of adopting
property rights. Here we calculate the minimum free allocation to fisherman i that is required
to ensure that the fisherman benefits from the transition to ITQs. Taking Equation 12,
Q
setting LE!IT
| i = 0, and solving for for i allows us to determine the minimum Pareto
i
Improving free allocation, summarized as follows:
24
This is the case under Condition 1. Inspecting Equation 15, it is actually possible for a fisherman to
benefit under ITQs, even under a zero allocation, provided price and harvest increase sufficiently following
ITQ adoption.
25
Though in such cases, the government earns significant revenue from the sale of fishing rights.
14
Corollary 3. The minimum Pareto Improving free allocation to fisherman i is:
¯ i = p̂ĥi
(p̃
⌧ )h̃
2⌧ ĥi
(17)
Simple comparative statics of Equation 17 reveals that ¯ i is increasing in harvest and
price under Limited Entry, and is decreasing in harvest, price, and share price under ITQs.
These calculations could inform the important debate on what fraction of access to public
trust resources to give away freely. In our application to the Gulf of Mexico Red Snapper
fishery, we find that ¯ i is approximately 33% for most fishermen in the Red Snapper fishery.
3.5
New Potential Entrants
Our analysis thus far has taken the perspective of incumbent fishermen and we have focused
on the welfare and distributional effects of a transition to ITQs. A related question concerns
the effects of the management institution on new entrants. Would a newly arriving fisherman
rather enter a Limited Entry fishery (in which case she would need to purchase a permit and
compete in the race to fish) or an ITQ fishery (in which case she would need to purchase
quota shares)? In both cases, the resource rent is just offset by the cost of entry, so a
new entrant’s welfare is entirely driven by inframarginal rent. Recall the definitions of
resource and inframarginal rents from Propositions 1 and 2 under Limited Entry and ITQs,
respectively. In a fishery managed with Limited Entry, a new entrant pays v̂0 to enter and
earns v̂0 + v̂1 from fishing, giving a net profit of v̂1 . In a fishery managed with ITQs, a
new entrant pays ṽ0 to enter and earns ṽ0 + ṽ1 from fishing, giving a net profit of ṽ1 . Thus,
whether a new entrant would prefer the fishery to be managed with Limited Entry, or ITQs,
will depend on v̂1 7 ṽ1 . We summarize this as follows:
Corollary 4. A new entrant j will prefer ITQs if and only if:
v̂1 =
p̂(ĥj
ĥN̂ )
2
<
(p̃
⌧ )h̃j
= ṽ1
2
(18)
Under Condition 1, a new entrant j will prefer ITQs if and only if:
hj
p
<
hN
⌧
(19)
Analyzing Corollary 4, whether a new entrant would prefer Limited Entry or ITQs will
depend on her characteristics. ITQs will tend to be favored by potential entrants if: (1)
their harvest is close to that of the marginal fisherman’s (i.e. the new entrant has low skill),
or (2) the output price is large relative to the ITQ share price. Consider an entrant j,
and assume Condition 1 holds. If potential entrant j has very low-skill, then ↵j < ↵N , in
which case she will not successfully enter either fishery. If she has slightly higher skill, so
↵j ⇡ ↵N and hj ⇡ hN , then she will surely favor ITQs, because p > ⌧ . In that case, she
earns zero inframarginal rent under Limited Entry, but earns positive inframarginal rent
under ITQs. At the opposite extreme, consider a potential entrant with very high skill, so
↵j > ↵1 . In that case hj >> hN , so the potential entrant would likely prefer Limited Entry
15
to ITQs, because she could earn significant inframarginal rents under Limited Entry, but she
would earn smaller inframarginal rents under ITQs and the cost of her quota share would be
significant. This new entrant analysis suggests that potential new entrants may be a class of
resource users that has a stake in institutional reform. Despite the clear aggregate gains in
resource value from adopting property rights, it is quite possible that new potential entrants
may prefer the Common Property regime.
4
Example: Gulf of Mexico Red Snapper
Our analysis thus far has focused on deriving theoretical results about the distributional
consequences of the transition to property rights in a common property resource. While
several insights emerge from that analysis, it is also readily amenable to empirical analysis.
We stress that, because we rely on aggregate data for our calculations, we cannot test some
of the parametric assumptions in the model (such as linear marginal extraction costs). With
those caveats in mind, in this section we relax Condition 1 and examine the distributional
impacts of a prominent US fishery that experienced the transition from Limited Entry to
ITQs. Our central focus is on the distributional consequences of management change, but
we also use the framework to calculate the aggregate welfare effects of this transition.
The Gulf of Mexico Red Snapper fishery has been exploited commercially for over 100
years. While the fishery declined substantially in the 1990’s from overfishing, it has recently
been rebuilt; today fishery-wide catch is approximately 8 million pounds per year, about
half of which is allocated to the commercial sector. The fishery transitioned to ITQs in 2007
following years of Limited Entry management, rendering it an ideal illustrative example
for our model. Here, we briefly describe the data and apply the theoretical results derived
in previous sections to calculate inframarginal and resource rents over time, by fishing firm,
which are used to characterize the aggregate gains and distributional effects under alternative
allocation rules.
We compiled our data from a variety of sources. Ex-vessel prices are from the Gulf of
Mexico Fisheries Management Council and the National Marine Fisheries Service and were
deflated using the Consumer Price Index. Average ITQ share and lease prices for the years
2007-2010 come from management reports from the Gulf of Mexico Fisheries Management
Council. Limited entry permit prices are not compiled by any public or private entity, so we
extracted them from historical issues of the leading trade publication in the region, Boats
and Harbors, which served as the main clearing house for Limited Entry permit transactions.
We obtained the archived issues directly from the publisher and recorded both bid and ask
prices from monthly issues dating back to 1999; we then calculated median permit prices by
year.26
Table 1 shows average annual ex-vessel prices, median permit prices under Limited Entry,
and quota lease prices under ITQs. The table includes Class I and Class II permit values,
26
In cases where the listing was repeated in subsequent months (based on the contact information provided), only the last listing was used in the analysis. In cases where multiple goods were listed for one price
(such as multiple permits), the permit price was calculated by subtracting the average price of the second
permit, when possible. When this was not practicable, those listings were excluded. For example, in multiple
cases a vessel was listed bundled together with a permit.
16
Table 1: Annual Descriptive Statistics
Pre-ITQ
$51,679.28
(8,312.49)
$3,880.63
(1515.89)
-
Class I Permit Price
Class II Permit Price
Lease Price ($/pound)
Post-ITQ
-
$2.76
(0.48)
Quota Share Price ($/pound)
$27.14
(7.78)
Ex-Vessel Price ($/pound)
$2.82
$3.92
(0.18)
(0.39)
Total Allowable Catch (gross pounds)
4,456,250
2,989,250
(548,008)
(515,599)
Notes: The averages of our annual observations are shown (authors’ calculations), with
standard deviations in parentheses. The years covered are 1999-2010, with Limited Entry
management through 2006, and ITQs in years 2007-2010. The total allowable catch (TAC)
is measured in gross pounds. Values are in 2007 Dollars.
which allow permit holders to harvest 2,000 and 200 pounds per trip, respectively. The
average value for a Class I permit is generally more than ten times as high as a Class II
permit, and harvest levels for the fishery are generally dominated by Class I permit holders.
The ex-vessel prices (product prices) are relatively flat in real terms, with a modest increase
in value after the implementation of ITQs in 2007. This is consistent with the literature on
ITQs, which often points to a product premium post-rationalization (Grafton et al. 2000).
The TAC was reduced with the implementation of ITQs in a rebuilding effort (consistent
with Costello and Grainger (2014) and Newell et al. (2005)). Finally, lease prices for ITQs
increased after the initial implementation in 2007, which suggests an increase in annual
profitability.27
To estimate the distributional impacts of the transition to ITQs, we need to parameterize
fisherman-level “effective effort” from our model. Under our model skill translates oneto-one to harvest (a fisherman harvests more under Limited Entry if and only if he is of
higher skill - see Equation 1), so parameterizing skill can be accomplished by observing the
fisherman-level harvest distribution. We obtained the year-by-year distribution of harvest
across fishermen through a Freedom of Information Act request. Due to privacy concerns,
data on the distribution of harvest are binned.28
27
Not shown here are the average values of reef fish permits, which must be held in addition to ITQ
rights in order to land red snapper post-2007. These values (roughly $3,500 per permit) are not used in the
calculation because a reef fish permit allows access not only to red snapper, but also to other reef fish in the
Gulf of Mexico. To the extent that part of the value of the Red Snapper ITQ program is capitalized into
reef fish permits, our estimates will lead to an undervaluation of the resource rent.
28
We assume that the harvest for each fisherman within that bin is the midpoint. This assumption seems
reasonable; summing across fishermen within any given year yields a figure within roughly one percent of
the total allowable catch for most years. Through a separate Freedom of Information Act request, the
17
Figure 1: Distribution of Harvest and Fleet Size Pre- and Post-ITQs
(a) Percent Harvest by Individual
(b) Fleet Size over Time
Note: Figure (a) shows the average distribution of harvest as a percent of the TAC under Limited Entry and
ITQs. The years covered are 1999-2006 for Limited Entry and 2007-2010 for ITQs. The distributions are
estimated using binned data, as described in the text. Figure (b) shows the number of commercial fishermen
with positive harvest in each year in the data. ITQs were implemented in 2007, which corresponds to the
decrease in fleet size.
As a point of illustration, the average distributions of harvest under Limited Entry and
ITQs are shown in Figure 1a. To construct the distributions, we first calculated the average
number of fishermen within a harvest bin over the periods 1999-2006 (Limited Entry) and
2007-2010 (ITQs). We then construct the cumulative distribution of these averages (i.e. the
average ranking of fishermen by harvest), which we use to estimate a regression of the form:
ln(harvesti ) = 0 + 1 Fi + 2 Fi2 + ✏i , where harvesti is the midpoint of bin i and Fi is
the ranking of the fisherman in bin i. For the Limited Entry and the ITQ regressions, the
R2 was higher than 0.99, so the smooth distribution provides a nice approximation of the
harvest data.29
These distributions suggest a relatively high degree of heterogeneity in skill, reflected by
a heterogeneous harvest distribution. Before proceeding, we note that under Limited Entry
there are many fishermen with small harvest levels, while a few (the exceptionally highly
skilled incumbents) enjoyed extremely large catches. Recalling our theoretical framework,
this pattern suggests that inframarginal rent, which accrued to select highliners, dominated
fishery value under Limited Entry. A few years after ITQs were implemented, once some
consolidation had occurred (see Figure 1b), we see fewer fishermen in the extreme ends of
the distribution. Combined with our theoretical results, this may reveal that the fishery was
dominated by resource rent in the ITQ regime.
In this numerical application, we continue to assume that prices are exogenous and costs
depend on skill. The cost functional form assumption, combined with the data on the
distribution of harvest, allows us to calculate the annual inframarginal rent for each fisherman
maximum harvest each year was also collected, which is used to estimate the inframarginal rents for the
highest harvester.
29
From the Limited Entry data, we estimate is ˆ0LE = 11.73891, ˆ1LE = 0.0247735, and ˆ2LE = 0.0000246,
and for ITQs is ˆ0IT Q = 11.50926, ˆ1IT Q = 0.0291503, and ˆ2IT Q = 0.0000308. In both specifications each
coefficient is significant at the 0.1% level.
18
and year.
Under Limited Entry we observe the market permit sales price, not its lease price. Assuming conditions are expected to continue, we can calculate the discount rate that rationalizes
the market for permits. Setting the observed permit price equal to 12 (1+r)
p̂ĥN , we calculate
r
the discount rate that rationalizes the market for permits. For the years 1999-2006, the
median discount rate r from this calculation is 11.5%, which we adopt for the remainder of
the analysis.
4.1
Distributional Effects: Complete Grandfathering
We showed in Section 3 that the distributional effects of ITQs hinges not just on inframarginal
vs. resource rents, but on the allocation of rights in an ITQ. In the Red Snapper fishery,
rights were completely grandfathered to Limited Entry incumbents based on their harvest
history. Thus, we begin by calculating the welfare effects of adopting ITQs when rights are
completely grandfathered (i.e. i = 18i). Equation 13 provides a formula for calculating
the gain to each fisherman under the transition from Limited Entry to ITQs under complete
grandfathering. We present the results of this exercise in Figure 2. The top line in the graph
shows a large, positive welfare change for every fisherman in the data when rights are fully
grandfathered under ITQs. For the marginal fishermen, the calculated gain is slight, but
their harvest levels were low prior to ITQs, as were rents to those individuals. For the highest
skilled individuals, the net welfare gain according to our model is substantial (greater than
$200,000 per year).
4.2
Distributional Effects: Alternative Allocation Formulae
Rather than assuming 100% grandfathering, we can calculate the gains (or losses) to individuals from the transition to ITQs using different levels of free allocation. Adopting
Equation 12 (and recall that we have relaxed Condition 1 throughout the empirical section),
we calculate the annual net welfare gain by fisherman for different levels of grandfathering
( ). Figure 2 reveals that grandfathering 75% or even 50% of historical catch would still
benefit all Limited Entry incumbents. This true despite the decrease in the overall quota
following the introduction of ITQs. But when grandfathering decreases to 33%, there is a
slight welfare loss for most incumbents. Allocations below 33% would result in a net loss
for Limited Entry incumbents from the transition to ITQs. The actual allocation in 2007
was fully grandfathered, suggesting that the gain to each person was much greater than was
necessary for a Pareto improvement. We address this explicitly in the next subsection.
4.3
Minimum Pareto Improving Allocation
Perhaps the most important policy-relevant question for our purposes is: How much grandfathering would be necessary to achieve a Pareto-improvement through the introduction of
property rights? If individuals earn significant inframarginal rent under the status quo, and
if resource rent is capitalized into quota share prices under ITQs, some grandfathering would
be required to make those individuals better off from the management change. Along those
lines, if fisherman support is required to implement ITQs, the minimum Pareto improving
19
Figure 2: Distributional Impacts of Alternative Initial Allocation Formulae
Notes: Using Equation 12, we calculate the annual net benefits to fishermen along the skill distribution from
transition from limited entry to ITQ management for alternative values of , the share of grandfathered
allocation based on historical harvest. Fishermen are ranked by their harvest; we assume that the transition
to ITQs preserves the ordering of fishermen because the binned harvest data do not allow us to track an
individual over time. The vertical axis measures 2007 US Dollars.
allocation is a relevant political question. Based on Figure 2, this level appears to be slightly
higher than 33% for the top fishermen, and around 33% for the lowest-skilled individuals.
Rather than a uniform allocation rule (which assigns the same allocation percentage ( )
to all incumbents), we can also use Equation 17 to individually tailor the free allocation to
fisherman i that would be required to render him indifferent between the two regimes. Our
calculations suggest that the top harvesters under Limited Entry earned nearly $200,000
per year in inframarginal rent. Rendering them indifferent would require freely allocating to
each fisherman about one-third of his historical share of catch. For the top harvesters, this
represents about 1% of the total annual harvest in 2010, substantially less than the 3% that
they harvested under Limited Entry. This line of reasoning continues to hold over the entire
fisherman distribution. Rather than grandfathering the entire fishery if, say, half had been
grandfathered to incumbents, they would have profited handsomely, leaving the other half
to be allocated to achieve other social objectives.
Indeed, the initial allocation of rights is a politically charged issue because it partly determines the distribution of wealth within (and across) generations. Our model and calculations
suggest that the top harvesters under limited entry would have an incentive to block a vote
to adopt property rights-based management if they do not receive a sufficient grandfathered
share of the overall quota,30 but that the generous free allocation was more than enough to
30
Though we do not go into detail here, anecdotal evidence from council meetings suggests that this has
occurred around the United States as regional councils have attempted to introduce individual transferable
quotas.
20
assuage this opposition.
4.4
Distributional Effects: New Potential Entrants
Our distributional results thus far have focused on incumbent fishermen who already own
a Limited Entry permit. Here we consider the welfare implications of ITQs on a potential
new entrant. A new entrant to a Limited Entry fishery would be required to purchase a
Limited Entry permit and would earn inframarginal rent depending on his skill. A potential
new entrant to an ITQ fishery would be required to purchase quota shares and would earn
inframarginal rent depending on his skill. Thus, the welfare effects of institutional reform on a
potential new entrant will hinge on inframarginal rent under Limited Entry vs. inframarginal
rent under ITQs. We invoke Equation 18; Figure 3 displays the net annual surplus to a new
entrant under Limited Entry and to the same entrant under ITQs, across a range of skill
levels.
The results suggest that most new entrants to the Red Snapper fishery would strictly
prefer Limited Entry to ITQs. This accords with our theoretical results: only low-skill
potential entrants would prefer ITQs. In this empirical example, all but the lowest-skill
harvesters would prefer Limited Entry because those fishermen earn larger inframarginal
rent under that regime, but they have to pay very little to enter such a fishery. In contrast,
it would cost those same fishermen a large amount to buy into the ITQ fishery, and they
stand to gain little in inframarginal rent. This is true even for high-skill individuals because
the quota share price, ⌧ , is high relative to the ex-vessel price, p.
Consistent with the widely-held belief that ITQs may disadvantage new entrants, our
empirical results suggest that new entrants may prefer common property to ITQs. Furthermore, this suggests that free allocations (perhaps in the form of community quota banks)
could be considered for new entrants as well as incumbents.
4.5
Aggregate Fishery Value
While we have focused on the distributional effects of adopting ITQs, we can also use our
model to calculate the present value of the fishery (see Proposition 3). Under ITQ management, the annual rent for a marginal unit of harvest is given by the lease price of a
quota share. Given the distribution of harvest in each year, we use our theoretical model to
calculate the implied rent to each fisherman.31 The highly skilled fishermen under Limited
Entry earn an average of roughly $200,000/yr. in inframarginal rent, while the best fishermen under ITQs earns an average of about $50,000/yr in inframarginal rent. The earnings
by less-skilled fishermen are commensurately smaller under both regimes. Of course, one
of the key messages of this paper is that much of this inframarginal rent is transferred to
resource rent under an ITQ. Indeed, the average present value of resource rent under Limited
Entry was about $10 million; this number increased to about $90 million under ITQs. The
aggregate value of the fishery also increased substantially, from $50 million (Limited Entry)
to over $100 million (ITQs). These aggregate results for both kinds of annual rent and the
present value of the fishery are shown in Figures 4a and 4b.
31
These calculations assume that the discount rate under ITQs is the same as the median rate calculated
from our the first equation in Proposition 3, 11.5%.
21
Figure 3: Rents to New Entrants, by Skill Type and Policy
Notes: Using Equation 18, we calculate the annual net benefits to a new potential entrant, across the entire
skill distribution. The vertical axis measures 2007 US Dollars.
Calculating means and standard deviations (shown in Figure 4a) over the years for each
type of management allows for some basic hypothesis testing for differences in means. Consistent with our theory, the move to ITQs results in a significant increase in annual resource
rent (the p-value is roughly 0.005) and a decrease in inframarginal rent (p-value is 0.025).
The total increase in the value of the fishery is also significant at the 5% level.
Figure 4b shows a doubling (which is significant at the 5% level) in the aggregate present
value of the fishery due to ITQ management. This increase in real value comes despite
decreases in the TAC post-rationalization to rebuild the fishery.32 By assigning property
rights in the common pool resource, the return to being skilled under the race for fish is
diminished and much of that value is transferred to the owners of the scarce resource.33
32
This is consistent with findings in Newell et al. (2005), who study asset values after the implementation
of ITQ fisheries in New Zealand. They find that an initial TAC decrease after rationalization led to a
subsequent increase in the value of quota in those fisheries.
33
An interesting point of comparison is the South Atlantic Snapper Grouper Fishery, which did not transition to ITQs. This fishery is managed by a multi-species permit program, so a direct application of our
model is not possible. However, evidence suggests that permit prices and ex-vessel permit prices have been
similar between the South Atlantic and the Gulf of Mexico prior to the Gulf’s transition to property rights.
Furthermore, the harvest distribution over individuals is unchanged over the past decade, whereas the Gulf
of Mexico saw a significant shift post-ITQ, which suggests that the increase in value seen in the Gulf is due
to the policy, not trends for the species or the region.
22
Figure 4: Inframarginal Rents, Resource Rents, and Total Value
(a) Annual Rents, by Type and Management
(b) Present Value of Fishery
Notes: Rents were calculated using the model and data described in the text. In (a), the annual averages
and 95% confidence intervals are shown for each category of rents. Limited Entry calculations include the
years 1999-2006, and ITQs include 2007-2010. Values are in 2007 Dollars. In (b) the average present value of
the fishery is shown for both types of management, as well as the breakdown of inframarginal and resource
rents.
5
Conclusion & Discussion
While economists generally favor market-based approaches for managing natural resources,
some incumbents in industry often oppose rights-based management. This has often perplexed economists, who point to significant increases in resource rent accruing from the
“rationalization” of fisheries. While the gain in resource rent can indeed be large, inframarginal rent under the status quo (such as Limited Entry management in fisheries) could
also be significant. As we show in our analytical model, the presence and magnitude of
inframarginal rents is driven by the degree of skill heterogeneity in the fishery.
Furthermore, our model illustrates how the adoption of rights-based management can lead
to a transfer of inframarginal rent to resource rent, and thus may lead some incumbents,
and many new entrants, to rationally oppose the transition.34 An important empirical
question here is whether the increase in resource rent can more than offset any decrease
in inframarginal rent that arises from rationalization. We find unambiguously that the
aggregate value does increase (often substantially), but to generate a Pareto improvement
would require careful attention to the free allocation to incumbents (see Deacon et al. (2013)).
This allocation must be sufficiently large to offset the inframarginal rents earned under
Limited Entry.
Our application to the Gulf of Mexico Red Snapper fishery also offer new insight into
the political economy of ITQ programs. One of the political barriers to the implementation
34
Moreover, our empirical findings are consistent with arguments as early as Copes (1970), who argued
that resource policy should stop the “single-minded” pursuit of resource rent capture.
23
of ITQs is often from highliners in a fishery, who support ITQs only under a generous free
allocation. Our model provides an economic rationale for this behavior: under Limited Entry
these fishermen enjoy substantial inframarginal rent. Upon the transition to ITQs, much
of this rent is transferred to resource rent, which is either shared equally among all asset
owners (if rights are freely allocated) or transferred to the government (if rights are sold by
the government). Only by providing a sufficiently large initial allocation (at least 33% in our
application) can the regulator ensure that all incumbents are advantaged by the transition.
New entrants that would have to buy in to the fishery will often prefer Limited Entry because
it may offer the best opportunity to capture inframarginal rent. This analysis suggests that
a reasonable allocation rule might be to grandfather half of the rights to incumbents (in
our model, this guarantees a Pareto improvement), and reserve the other half to reduce the
burden on new entrants.
This paper also provides a useful framework based only on marketprices and the harvest
distribution for roughly estimating the change in rent due to changes in management. Historically it has been difficult to estimate the change in economic value of a resource like a
fishery, mainly because data limitations preclude the estimates of revenues and costs at the
micro level. We propose a new method, based solely on publicly-available data, to examine
the change in rent due to management changes. Like other methods, our model is based
on assumptions about the functional form of marginal extraction cost and well-functioning
markets for permits and fishing quota. That said, our model suggests more than a doubling
in the real value of the fishery due to rights-based management (and more than a 1000%
increase in market capitalization, or resource rent). This is similar in magnitude as some
estimates using microdata (e.g. Grafton et al. (2000) and Weninger and Waters (2003)).
To maintain analytical tractability, and to facilitate the empirical calculations, we have
made a number of simplifying assumptions. Many of these specifics could be modified or relaxed if better information were available on the resource in question (e.g. if the cost function
were known to be other than quadratic in inputs). Nevertheless, several caveats are in order.
First, in fisheries where skill is easily duplicable, returns to skill will be reduced. This would
drive down our estimates of inframarginal rent. Second, in some fisheries heterogeneity in
harvest may arise due to unobserved investment (such as in racing capital), independent of
skill. As a result, we may wrongly attribute returns to that capital as inframarginal rent,
which would overstate the total rent under Limited Entry and understate the gains from the
introduction of ITQs. This is outside the scope of our model because we analyze the fishery in equilibrium. Finally, it is reasonable to question whether some exogenous factor was
responsible for the large gain in market capitalization following the transition to ITQs. As
a point of comparison, we analyzed a similar fishery (the South Atlantic Snapper Grouper,
which did not transition to ITQs). Over the period of our analysis, the South Atlantic fishery
maintained a roughly constant harvest distribution, permit price, and rent, suggesting that
no macro-level exogenous factor was responsible for the large gains our model attribute to
ITQs.
It is worth briefly discussing what drives the results in this paper and where we would
(and would not) expect the model to be of particular interest. Our results are driven by
the presence of heterogeneity in a well-established fishery. To the extent that a fishery is
mature, where enforcement is strong, and where there is significant heterogeneity in skill (or
firm size) prior to property rights, we expect our model to speak to distributional impacts
24
of the transition to property rights. This is because inframarginal rents would be expected
to be substantial under such circumstances, which leads to the results surrounding initial
allocation in this paper. Similarly, because our paper is effectively static (and studies only
one fishery), there could be distributional impacts through other channels, such as spillovers
into nearby fisheries or other sectors (Hutniczak 2014).
On the other hand, in fisheries where a fleet is relatively homogeneous, there would be
little difference between the marginal fisherman and the highest-skill individual. In such a
case, the value of access under limited entry to a high-skill individual would be low, and as
indicated by our model, one would expect resource rents to dominate. Similarly, in fisheries
where allocation is given to sectors (Holland et al. 2013) (Scheld et al. 2012)) or processors
as well as fishermen (e.g. in the Alaskan crab rationalization program), the results could
be substantively different from our case study of the Red Snapper. Other examples where
our results may not generalize include the South Atlantic Wreckfish Fishery, which was not
mature at the time of transition to ITQs, and where rights were not strongly enforced postITQ (e.g. (Yandle and Crosson 2015)), or the Peruvian IVQ Program for anchovies, which
has had relatively poor monitoring under property rights and where inframarginal rents preIVQ (i.e. under the extreme racing conditions documented in the literature) were likely small
(e.g. (Tveteras et al. 2011)).
This analysis lends insight into a complex political economy problem. We focus on fisheries, but there are analogous policy changes in other resources or sectors, such as agriculture,
where there is resistance to market reforms (see for example Rucker et al. (1995)). The allocation of rights in ITQ programs, or similarly in the allocation of water or forestry rights,
determines the allocation of future profits. But it also can take away potential inframarginal
rent from those who are very skilled at extracting resources under current management rules.
While these distributional implications are not new in resource economics, this model shows
conditions under which we would expect these problems to be especially prevalent.
25
References
Anderson, L. G. (1989). Conceptual constructs for practical itq management policies. In
Rights Based Fishing, pp. 191–214. Springer.
Anderson, T. L., R. Arnason, and G. D. Libecap (2010). Efficiency advantages of grandfathering in rights-based fisheries management. Technical report, National Bureau of
Economic Research.
Arnason, R. (2012). Property rights in fisheries: How much can individual transferable
quotas accomplish? Review of Environmental Economics and Policy 6 (2), 217–236.
Bromley, D. W. (2009). Abdicating responsibility: the deceits of fisheries policy. Fisheries 34 (6), 280–290.
Clark, C. (1990). Mathematical Bioeconomics. Wiley, New York.
Coglan, L. and S. Pascoe (1999). Separating resource rents from intra-marginal rents in
fisheries’ economic survey data. Agricultural and Resource Economics Review 28, 219–
228.
Copes, P. (1970). Factor rents, sole ownership and the optimum level of fisheries exploitation. Burnaby, BC: Simon Fraser University, Department of Economics and Commerce.
Costello, C. and C. Grainger (2014). Property rights, regulatory capture, and the exploitation of natural resources. Working Paper .
Deacon, R. T., D. P. Parker, and C. Costello (2013). Reforming fisheries: Lessons from a
self-selected cooperative. Journal of Law and Economics 56 (1), 83–125.
Environmental Defense Fund (2014). Catch share fisheries and resources. Technical report.
Gordon, H. S. (1954). The economic theory of a common-property resource: the fishery.
The Journal of Political Economy, 124–142.
Grafton, R. Q., D. Squires, and K. J. Fox (2000). Private property and economic efficiency:
A study of a common-pool resource*. The Journal of Law and Economics 43 (2), 679–
714.
Holland, D. S., A. W. Kitts, P. PINTO DA SILVA, and J. Wiersma (2013). Social capital
and the success of harvest cooperatives in the new england groundfish fishery. Marine
Resource Economics 28 (2), 133–153.
Homans, F. R. and J. E. Wilen (2005). Markets and rent dissipation in regulated open
access fisheries. Journal of Environmental Economics and Management 49 (2), 381–
404.
Hutniczak, B. (2014). Increasing pressure on unregulated species due to changes in individual vessel quotas: an empirical application to trawler fishing in the baltic sea.
Marine Resource Economics 29 (3), 201–217.
Johnson, R. N. (1995). Implications of taxing quota value in an individual transferable
quota fishery. Marine Resource Economics 10, 327–340.
Johnson, R. N. and G. D. Libecap (1982). Contracting problems and regulation: the case
of the fishery. The American Economic Review , 1005–1022.
26
Karpoff, J. M. (1987). Suboptimal controls in common resource management: the case of
the fishery. The Journal of Political Economy, 179–194.
Lian, C., R. Singh, and Q. Weninger (2009). Fleet restructuring, rent generation, and the
design of individual fishing quota programs: Empirical evidence from the pacific coast
groundfish fishery. Marine Resource Economics 24 (4), 329–359.
Newell, R. G., J. N. Sanchirico, and S. Kerr (2005). Fishing quota markets. Journal of
Environmental Economics and Management 49 (3), 437–462.
Reimer, M. N., J. K. Abbott, and J. E. Wilen (2014). Unraveling the multiple margins of
rent generation from individual transferable quotas. Land Economics 90 (3), 538–559.
Rucker, R. R., W. N. Thurman, and D. A. Sumner (1995). Restricting the market for
quota: an analysis of tobacco production rights with corroboration from congressional
testimony. Journal of Political Economy, 142–175.
Scheld, A. M., C. M. Anderson, and H. Uchida (2012). The economic effects of catch
share management: the rhode island fluke sector pilot program. Marine Resource Economics 27 (3), 203–228.
Schnier, K. E. (2009). Spatial externalities and the common-pool resource mechanism.
Journal of Economic Behavior & Organization 70 (1), 402–415.
Tveteras, S., C. E. Paredes, and J. Peña-Torres (2011). Individual vessel quotas in peru:
stopping the race for anchovies. Marine Resource Economics 26 (3), 225–232.
Weninger, Q. and J. R. Waters (2003). Economic benefits of management reform in the
northern gulf of mexico reef fish fishery. Journal of Environmental Economics and
Management 46 (2), 207–230.
Yandle, T. and S. Crosson (2015). Whatever happened to the wreckfish fishery? an evaluation of the oldest finfish itq program in the united states. Marine Resource Economics 30 (2), 193–217.
27