Implied Discount Rates in the Gulf of Mexico Commercial Red Snapper IFQ Program
Andrew Ropicki and
No 205711, 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California from Agricultural and Applied Economics Association
Catch shares fishery management schemes, including individual fishing quota (IFQ) programs, have become a popular tool for fishery managers trying to stop overfishing. IFQ, in theory, provides quota owners with the “right” to a share of both the current catch and all future harvests. By making quota a perpetual asset it is in the fishermen’s best interest to protect future harvests by not overharvesting in the current period. Overharvesting now will decrease future landings and the value of quota going forward. In most IFQ programs quota is tradable; and many IFQ programs allow for not only the sale of quota (the perpetual asset) but also the leasing of quota during a given year (the lessee attains the right to harvest the quota this year but the lessor retains the right for all subsequent years). In a number of IFQ fisheries leasing is the predominate form of quota trading. During the first five years of the Gulf of Mexico red snapper IFQ program (2007-2011) there were 16 times more quota lease than sale trades and the amount of quota pounds traded through leasing was 12 times the amount of pounds traded through sales. Newell, Sanchirico, and Kerr (2005) found that quota lease transactions increased 10-fold in New Zealand IFQ fisheries from approximately 1,500 in 1986 to about 15,000 in 2000 representing approximately 45% of the total allowable catch (TAC), while sales of quota only accounted for about 5% of the TAC. Quota leasing in the British Columbia halibut IFQ program rose steadily from program implementation in 1993 to reach 79% of the TAC in 2006 (Pinkerton and Edwards 2009). The Tasmanian rock lobster IFQ program saw similar large amounts of quota leasing with 44% of the TAC leased in 2007 the ninth full year of the program, during the same year only 3% of the TAC was sold (van Putten et al. 2010). The predominance of leasing as the major form of quota exchange in these IFQ programs has been accompanied by the growth of two distinct types of quota fishery participants: investors and lease-dependent fishers. Investors are quota owners that do not fish and simply hold quota as an investment that pays dividends through lease payments. Lease dependent fishers are those fishers that do not own quota and lease in their entire quota. During the first five years of the Gulf of Mexico red snapper IFQ program the percentage of red snapper landings caught by lease dependent fishers increased from 9% to 26% while the share of quota owned by investors increased from 13% to 27%. The preponderance of quota leasing in these markets leads to the question: do potential buyers and sellers of quota have inherently different valuations of quota that preclude trading in the quota sale market? The implementation of a catch shares management program that allows for both the sale and lease of quota provides an opportunity to analyze discount rates in the fishery. In an IFQ fishery each fishing firm has an incentive to buy, sell, or lease quota until it attains just enough quota to cover a level of catch that maximizes its profits. The value of quota is the discounted value of all future cash flows provided by the quota or the resource rent earned from harvesting the quota. The quota lease price should equal the profit from harvesting that fish. If we assume fishing firm i has the generic profit function shown in equation 1 where p is the exogenously determined dockside price of fish, qi is the amount of fish landed, and c(qi) is a function representing firm i’s cost of catching qi fish; then maximizing profits with respect to landings, subject to the constraint that firm i holds enough quota to cover qi level of catch, the firm will be willing to pay λi to lease quota as shown in equation 2. πi=pqi- c(qi) (1) λi=p- c'(qi) (2) The expected present value of quota for firm i then is the expected future values of leasing that quota discounted back at an appropriate discount rate, r, as shown in equation 3. E(V_(i,0))= ∑_(t=0)^∞▒λ_(i,t)/〖(1+r_i)〗^t (3) This research inspects the link between IFQ lease and sale prices using survey data and examines the variation in implied discount rates between different groups of quota market participants, namely potential quota buyers and potential quota sellers. Respondents were classified as either potential quota buyers or potential quota sellers based on past trading activity (those that historically leased in quota were classified as potential buyers while those who usually leased out quota were classified as potential sellers). Using survey data from the Gulf of Mexico Red Snapper and Grouper-Tilefish IFQ program participants we were able to examine participants implied discount rates using a dividend discount valuation model. IFQ participants were surveyed to determine at what prices they would buy and sell quota and lease in and out quota, their expectations about future growth of the quota, and their expectations regarding the longevity of IFQ management in the fishery. By accounting for participant expectations regarding the growth of the quota and the future of IFQ management in the fishery we are able to not only measure fundamental differences in respondents’ expectations regarding the future of the fishery, but also control for differences in quota valuation due to factors other than the implied discount rate.
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