RANDOM PENALTIES AND RENEWABLE RESOURCES: A MECHANISM TO REACH OPTIMAL LANDINGS IN FISHERIES

Abstract Recent literature considers illegal landings a moral hazard problem that arises because individual landings are unobservable. The literature proposes incentive schemes to solve the information problem. However, most of the proposed schemes raise huge information requirements and social budget balance is not secured. In this paper, we suggest a random penalty mechanism that reduces the information requirements and secures budget balance in the case of a given number of licensed vessels. In the random penalty mechanism, aggregate landings are measured through stock sizes and the natural growth function. If aggregate landings are below optimal landings, each fisherman receives a subsidy. If aggregate catches are above optimal landings, the mechanism works such that either the fisherman is randomly selected and pays a fine or the fisherman is not selected and receives a subsidy. The fine and subsidy can be designed such that budget balance is secured. Provided risk aversion is sufficiently large and the fine is high enough, the random penalty mechanism will generate optimal individual landings. The budget balance combined with risk aversion drives the result for this advanced tax/subsidy system that does not exhaust the resource rents. The budget balance creates interdependence between fishermen that secure optimality.