Individual transferable vessel quotas and efficient restructuring of the primary harvesting sector

Over the last three decades most of the world's fisheries have been subject to management programs that have tried to limit the use of key fishing inputs. Inevitably, these restrictions have proven ineffective at preventing rent dissipation and stock depletion. More noteworthy is that fishers have subverted the intentions of these restrictions by adjusting the primary harvesting technology. This has led to an inefficiennt industrial structure characterized by capital stuffing on the part of each vessel, excess employment, an inefficient mix of vessels in the fleet, and too many vessels altogether. A promising means of encouraging more efficient primary harvesting is the individual transferable vessel quota (ITVQ) that allocates a given catch to each vessel, thereby giving an incentive to catch the quota at least cost. This paper examines efficiency gains and potential industry restructuring from the introduction of an ITVQ into a fishery that was previously subject to input restrictions. Using data from the British Columbia salmon fishery, this paper estimates restricted cost functions for each of four different vessel types and simulates the operations of a market for ITVQs. The demand for quota comes from individual vessels and is found by differentiating the cost function with respect to the shadow price of quota. The market for quota is in equilibrium when the total demand for quota is equal to the fixed supply of quota set by the government. This implicitly defines the equilibrium quota rental price. Results show that the ITVQ could generate unit rental prices for quota between 31 and 93 cents per pound (18–53% of the average landed price). Using this simulated price, each vessel's cost-minimizing strategy is defined and both low cost vessels (those that will buy quota) and high cost vessels (those that will sell quota and exit the fishery) are identified. Quota trades between the two groups result in efficiency gains. These include reduced capital stuffing, exit of less efficient vessel types, attainment of economies of scale, and an efficient composition of vessel types in the fleet. In aggregate these gains lead to an estimate of annual resource rent that is approximately equal to one third of the value of the catch.