Participation in a Limited-Entry Fishery: An Options Approach

Abstract

This paper examines the ability of simple financial models to explain fishermen’s participation decisions in the California commercial salmon fishery. The limited-entry structure of this fishery makes exit largely irreversible, suggesting that a real options approach to modeling entry, exit, and idling decisions may be fruitful. We formulate and analyze two options models, one in which an active fisherman faces a simple choice between fishing and permanent exit, and a second in which the fisherman also has an option to suspend fishing operations while continuing to pay an annual license fee. A comparison of model predictions to observed choices by fishermen provides a test of the explanatory power of these models. The two options models are also tested against two alternative models, one a net present value model and the other a naïve projection model. When assessed by the number of boats for which model predictions are correct, the naïve projection model does best, followed by the options models, while the net present value model has the least predictive power. When predictions are weighted by landings, the naïve projection model (by construction) cannot be directly compared to the others, but the options model scores better both in absolute terms and relative to the performance of the net present value model. We conclude that the options models represent a clear improvement over net present value models, although it is unclear whether their predictive power is sufficient to support management decisions. While fishermen’s behavior is obviously much more complex than is represented by any of the models presented here, the ability of simple models to perform reasonably well in a fishery in which only revenue data are available suggests the technique may be applicable to other fisheries, particularly more capital-intensive fisheries.

Source: Tomberlin, D., and V. Bosetti. 2004. “Participation in a Limited-Entry Fishery: An Options Approach.” Presented at the NOAA Fisheries Economics & Social Science Workshop, October 26-28, 2004, New Orleans, LA.

For more information, please contact: David.Tomberlin@noaa.gov