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Abstract
Asymmetric information between fishermen and the regulator is important within fisheries. The regulator may have less information about stock sizes, prices, costs, effort, productivity and catches than fishermen. With asymmetric information, a strong analytical tool is principal-agent analysis. In this paper, we study asymmetric information about productivity within a principal-agent framework and a tax on fishing effort is considered. It is shown that a second best optimum can be achieved if the effort tax is designed such that low-productivity agents rent is exhausted, while high-productivity agents receive an information rent. The information rent is equivalent to the total incentive cost. The incentive costs arise as we want to reveal the agent's type.
Acknowledgements
We thank the participants at the IIFET conference in Montpellier, 2010, for valuable comments and discussions. In addition, we thank two anonymous referees and the editor for valuable comments and suggestions.
Notes
1. Especially, there is asymmetric information about stock size. Some fishermen over- or underestimate stock size, while society does the same in other cases. A difference in perception of stock size makes it difficult to reach an agreement on the reduction of the harvest.
2. We use the term fishermen and agents synonym to vessels.
3. In reality, fishing effort is a multi-dimensional variable and substitution between various components may occur (see Squires, Citation1987). However, fishing effort may be approximated with fishing days and a Leontief production function may be assumed. Note, however, that we abstract from this problem in the paper by treating effort as one-dimensional variable.
4. We assume that the optimal total catch is so large that the low-productivity agent participates. If this was not the case, we would have a standard fisheries economics taxation problem (see Clark, Citation1990). Note that we have all the information necessary for solving this problem.
5. It is assumed that effort is observable, while there is imperfect information about productivity. In addition, harvest is unobservable. It is not obvious that fishing effort is observable. However, fishing effort may be approximated with fishing days, and cheating with fishing days is less likely to occur. Note, also, that in the Faroe Islands and a number of United States fisheries, a regulatory system with transferable fishing days is used.
6. In the setting in this paper, society implements the tax policy for one period and observes the result. In the ensuing periods, asymmetric information will not exist. This implies that we adopt a static model. Alternatively, we could assume a situation in which productivities of producers vary between time periods, which would require a dynamic model. However, to keep the model simple, a static model is used in this paper.
7. Note that the fishermen are assumed to disregard the resource restriction, which is a well-known assumption in fisheries economics (see Clark, Citation1990), and correspond to the standard case with stock externalities.
8. Note that E*(β) also depends on stock size. However, we do not use the derivatives of effort with respect to stock size for anything in the paper. Therefore, for simplicity, we write E*(β) instead of E*(β, x).
9. This result requires a zero discount rate, as assumed in the present paper.
10. Although we have all the necessary information to solve the dynamic problem and allow for adjustments towards equilibrium, this is left out as it would complicate the analysis without adding new information to the principal-agent analysis.
11. Now we see why the analysis generalises to continuous type of agents. With continuous type of agents, the marginal participating fishermen receive a surplus on zero, while the infra-marginal agents receive a surplus. This result is a generalisation of the result in the present paper.
12. Note that we maximise the profits before taxes plus the value of the tax revenue equal to . The value of the tax revenue corresponds to the value of a reduction in the distortion due to taxation elsewhere in the economy. It might be claimed that society should maximise after tax profit, which is the rent achieved by fishermen. However, in fisheries, it is common to maximise before tax revenue when studying taxation (see Clark, Citation1990). With the double-dividend assumption, we add tax revenue to the profit. Note that this is not double counting. In EquationEquation 12, the tax does not represent the value of the reduced stock externality. Instead the tax is a benefit from taxation. The stock externality is measured by the shadow price included because of EquationEquation 7.
13. In EquationEquation 12, x is state variable.
14. As mentioned above, it may seem strange that we do not solve the dynamic problem (inclusion of discounting) because we have all the necessary information to do so. However, including discounting would complicate the analysis and would not add anything new.
15. As mentioned above, we assume that the optimal total catch is large enough for the participation of low-productivity agents.
16. With x as the state variable, we also have an optimality condition with respect to x. However, in calculating the optimal tax, we only need the first-order conditions with respect to effort. Thus, the optimality condition, with respect to x, is unnecessary and is not included in the first-order conditions.
17. Note that we assume that marginal costs are constant. This is in line with the assumptions about c(E, x).