Price Uncertainty, Expectations Formation and Fishers' Location Choices

Abstract

This paper deals with the effects of uncertain output prices upon fishers' location choices. It employs ARIMA models to construct the price forecasts used by fishers in a model which generates expected profits for three fishing locations in the British Columbia salmon fishery. A random utility model of fishing location choice is then estimated using two different sets of regressors. The first is expected seasonal profit and its variability. The second is expected wealth and its variability, where expected wealth is taken to be the sum of the known preseason wealth and the expected profitability of a given fishing location. Results show that expected profitability is a significant determinant of fishing location choice but that expected wealth plays an even bigger role. This suggests that there is a type of wealth or stock effect present in decisions made by fishers. The results also provide evidence that the variability of profits or wealth is generally a less significant component in regard to fishing location choice. In fact, some fishers thrive on greater variability, thereby providing some evidence of the risk loving behaviour typically attributed to fishers. This is not the case, however, for all fishers since some are found to be risk-neutral and even risk-averse. Given the finding that fishers do respond to economic incentives, one policy implication concerns the ability of fisheries managers to alter the dispersion of fishers over fishing locations via the adjustment of the economic incentives by means of differential royalty taxes. A second policy implication results from the finding of risk-loving behaviour. This calls into question models that assume risk-averse behaviour and predict a dominance of crop-sharing contracts over wage contracts.