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Fondazione Eni Enrico Mattei


  • Valentina Bosetti

    (Fondazione Eni Enrico Mattei)

  • David Tomberlin

    (NOAA, National Marine Fisheries Service, Southwest Fisheries Science Center)


This paper develops and tests a dynamic optimization model of fishermen’s investment behavior in a limited-entry fishery. Because exit from limited-entry fisheries may be irreversible, the fisherman has an incentive to maintain the right to fish (whether by actually fishing or by purchasing an annual license) even when the fishery is not profitable, in the hope that conditions may improve. This incentive provides at least a partial explanation for excess capacity in fishing fleets, one of the most pressing fisheries management issues in limited-entry (and other) fisheries around the world. To assess the ability of simple financial models to explain observed investment behavior, we develop a two-factor (price and catch) real options model of the decision problem faced by an active fisherman who has the option to exit a fishery irrevocably. The immediate reason for adopting a two-factor model is the hope of achieving greater predictive power, since obviously both price and catch are important to fishermen’s decisions. Another advantage to this approach is that it provides a mechanism by which investment behavior can be linked in a real options framework to exogenous factors that affect price and catch separately. For example, international market forces are likely to affect price while having a negligible effect on a local fish stock, while local fish stock dynamics may affect catch directly but have little influence on prices (assuming the demand for a particular fish is relatively elastic). In a comparison of model predictions about fishermen’s exit decisions to 5059 observed decisions in the California salmon fishery in the 1990s, 65% of the model’s predictions are correct, suggesting this approach may be useful in the analysis of fishing fleet dynamics.

Suggested Citation

  • Valentina Bosetti & David Tomberlin, 2004. "Fondazione Eni Enrico Mattei," Working Papers 2004.102, Fondazione Eni Enrico Mattei.
  • Handle: RePEc:fem:femwpa:2004.102

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    References listed on IDEAS

    1. Boyce John R., 1995. "Optimal Capital Accumulation in a Fishery: A Nonlinear Irreversible Investment Model," Journal of Environmental Economics and Management, Elsevier, vol. 28(3), pages 324-339, May.
    2. Clark, Colin W. & Munro, Gordon R., 1975. "The economics of fishing and modern capital theory: A simplified approach," Journal of Environmental Economics and Management, Elsevier, vol. 2(2), pages 92-106, December.
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    Cited by:

    1. Valentina Bosetti & David G. Victor, 2011. "Politics and Economics of Second-Best Regulation of Greenhouse Gases: The Importance of Regulatory Credibility," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 1-24.
    2. Otto, Vincent M. & Löschel, Andreas, 2008. "Technological Uncertainty and Cost-effectiveness of CO2 Emission Trading Schemes," ZEW Discussion Papers 08-050, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    3. Massimo Tavoni & Valentina Bosetti & Carlo Carraro, 2009. "Climate Change Mitigation Strategies in Fast-Growing Countries: The Benefits of Early Action," Working Papers 2009.53, Fondazione Eni Enrico Mattei.
    4. Asbjørn Aaheim & Rajiv Chaturvedi & Anitha Sagadevan, 2011. "Integrated modelling approaches to analysis of climate change impacts on forests and forest management," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 16(2), pages 247-266, February.
    5. Bosetti, Valentina & Carraro, Carlo & De Cian, Enrica & Massetti, Emanuele & Tavoni, Massimo, 2013. "Incentives and stability of international climate coalitions: An integrated assessment," Energy Policy, Elsevier, vol. 55(C), pages 44-56.
    6. Barbier, Edward B., 2010. "Global governance: the G20 and a Global Green New Deal," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 4, pages 1-35.
    7. Ranson, Matthew & Stavins, Robert N., 2012. "Post-Durban Climate Policy Architecture Based on Linkage of Cap-and-Trade Systems," Working Paper Series rwp12-025, Harvard University, John F. Kennedy School of Government.
    8. Miyuki Nagashima & Rob Dellink, 2008. "Technology spillovers and stability of international climate coalitions," International Environmental Agreements: Politics, Law and Economics, Springer, vol. 8(4), pages 343-365, December.
    9. Enrica De Cian & Valentina Bosetti & Alessandra Sgobbi & Massimo Tavoni, 2009. "The 2008 WITCH Model: New Model Features and Baseline," Working Papers 2009.85, Fondazione Eni Enrico Mattei.
    10. Julien Chevallier, 2012. "Banking And Borrowing In The Eu Ets: A Review Of Economic Modelling, Current Provisions And Prospects For Future Design," Journal of Economic Surveys, Wiley Blackwell, vol. 26(1), pages 157-176, February.
    11. Marzio Galeotti & Carlo Carraro, 2004. "Does Endogenous Technical Change Make a Difference in Climate Policy Analysis? A Robustness Exercise with the FEEM-RICE Model," Working Papers 2004.152, Fondazione Eni Enrico Mattei.
    12. Gren, Ing-Marie Gren & Elofsson, Katarina, 2013. "Value of land use for carbon sequestration: An application to the EU climate policy," Working Paper Series 2012:4, Swedish University of Agricultural Sciences, Department Economics.
    13. Takanobu Kosugi, 2010. "Assessments of ‘Greenhouse Insurance’: A Methodological Review," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 17(4), pages 345-363, December.

    More about this item


    Real option investment; Numerical methods; Fisheries;

    JEL classification:

    • Q22 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Fishery
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty


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