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Fleet reduction through licence removal : an application of auction theory Gregory, Mary

Abstract

Auction theory has been recognised as an appropriate valuation and allocation rule when non-standard items are transacted. This paper presents a study of the Pacific Salmon Licence Retirement Program (1996) to provide an analysis of this type of auction program in practise. The licence retirement program was motivated by a combination of overcapitalisation in the Pacific salmon fleet and resource declines. The first section discusses the excess capacity problem in fisheries management and alternative measures to address it. A description of the Pacific salmon fishery sets the context of the study and an outline of the Pacific Salmon Licence Retirement Program (1996) provides details of the auction used. A review of auction theory literature presents the basis for use of this allocation method. The data analysis of 1,722 separate bids indicates that licence values are difficult to assess but are related to licence and observable vessel attributes. The multidimensional scaling analysis finds that the bids submitted to the Program are close to one another in terms of reasonableness. The regression analysis supports the correlated or common value model as an appropriate bid valuation method in the gillnet, seine and troll fleet sectors. Elements of program design in this instance were specifically focused on collecting data to mimic "market" behaviour. The use of multiple bidding rounds produced cost savings to the Program of approximately $6.7 million and signaled to second round bidders appropriate licence values. The study finds that the initial passive role of the auctioneer permitted bidders to reveal information on bid values, but that revelation of the information obtained in the first bidding round could contribute to program success. Equity concerns, arising from variation in bid valuation might also be addressed through establishment of multiple bidding rounds at the outset of such a program.

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