Abstract

This paper tries to fill a gap in the fisheries economics literature by proposing static and dynamic models with side payments in a stochastic and sequentially harvested fishery. The incentive problem considered in this paper arises between two central regulatory authorities who manage an internationally shared fishery, i.e., when the regulator of one fishing nation (Principal) provides monetary compensation to induce the regulator of another country (Agent) to restrict own fishing activities. Most of the previous analysis for international fishing agreements had either focused on cooperation without side payments (and particular in the context of common-pool resources), or had introduced payments under the implicit assumption that it is politically acceptable for a fishing nation to completely ``buy-out'' another. Compensation in this paper, instead, induces the Agent to harvest less extensively, keeping nonetheless the right to operate exclusively in her own area. The conditions characterizing the solution of the dynamic model in this paper are the analogue of the Martingale Property from the finance literature. The Western Atlantic Bluefin Tuna fishery serves as an example to illustrate the model with some plausible parameter values. The calibrated model predicts that side payments from Canada to the US could increase Canadian welfare by US$5–10 million, if predicted by the static model; and between US$9.7–16.3, if predicted by the two-period model. Overall, the theoretical development and empirical application of this paper illustrate how side payments can be a helpful additional instrument for designing international fishing agreements.