Characteristics of Limited Entry Fisheries and the Option Component of Entry Licenses

Abstract

Entry limitations are frequently proposed as a partial solution to the common pool problem that characterizes most fisheries. Entry limitations have actually been imposed, however, in only a few fisheries.' At first glance, this situation contradicts the self-interest hypothesis of regulation, because most proposals to limit entry would convey entry licenses to many existing fishermen at a nominal price. Johnson and Libecap (1982) attributed the apparent contradiction to fisherman heterogeneity and the costs of devising and enforcing contracts or regulations that would be supported by most fishermen. In a recent paper (Karpoff 1987), I argue that traditional regulations such as capital constraints and season closures are popular because they redistribute the catch toward the politically dominant fishing groups. This paper directly examines conditions under which fishermen are likely to support entry restrictions. Entry restrictions generate positive (quasi-) rents precisely because they exclude or have the potential to exclude some fishermen. The probability of exclusion is positive for most fishermen, so advocacy of entry restrictions is not riskless. For many fishermen the risk of exclusion outweighs the expected gain from restricted competition. When fishermen do advocate entry restrictions, they do so when the expected net gain is positive. One factor that affects the net gain is the variability of fishing income. This point is made by noting that limited entry licenses are similar to call options on future increases in revenue over cost and by developing an exact option-based model to value entry licenses. There are numerous potential applications of this model. It offers the important advantage of requiring information only on factors that can be easily estimated, and it yields comparative static results that can be used to assess the effects on license values of environmental or regulatory changes.