Price Discovery in CapandTrade Markets for Fisheries

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Price Discovery in Cap-and-Trade Markets for
Fisheries

• Christopher M. Anderson
• (joint work with Jon G. Sutinen)
• University of Rhode Island
• (Visiting UAA Fall 2007)

Funded by Rhode Island Sea Grant
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New Markets

• Cap-and-trade systems create brand new assets
• Market must identify prices
• New asset markets are prone to volatility and
  speculation
• IPO stock prices fluctuate considerably
• Experimental asset markets demonstrate
  speculative bubble-crash cycles

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Volatility is Bad

• Speculation can raise prices artificially
• Poor price signals lead to poor participation and
  capitalization decisions
• Puts at risk substantial portions of harvesters
  wealth
• May support consolidation if larger operators can
  better diversify risk
• Leads to political opposition to market-based
  management

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Improving Price Discovery

• The rules of trade can be chosen to facilitate
  faster price discovery
• Who may trade, when, how much, how often
• What is traded, and what is the currency
• How trade is facilitated by market
• Do you really need designer markets?
• Theory doesnt say yes
• In practice, know different institutions provide
  different incentives for revealing information
• Have different price discovery properties

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Why Experimental Testbedding?

• Controlled test of predictions of economic models
  underlying proposed regulatory mechanisms
• Cheaply and quickly evaluate economic properties
  of proposed program elements
• Supply, demand and profit functions are known,
  making possible precise comparisons of efficiency
  and other criteria
• Results can be replicated, following scientific
  method
• Identify flaws or potential issues in proposals
  before implementation and high-value or
  irreversible decisions are made
• Differences among market designs not informed by
  theory, but loom large in determining outcomes
• Past experience with FCC auctions, and water and
  pollution permit markets (and AK crab
  rationalization!) indicates experiments can
  improve field outcomes

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Motivating Case

• Transferable trap certificate program in RI
  lobster fishery
• 280 owner-operated vessels
• Regulated by limited access, but all allowed
  access at the same level
• Stock decreasing due to unknown factors, and
  overfishing

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Experimental Design

• 12-14 student subjects earn profit (from fishing)
  based on the allowance held
• Profit functions roughly based on 2001
  medium-large operation
• Allowance Permit
• An entitlement to fish a fixed number of traps
• Permit has life of 4 periods
• Trade allowance during each period
• Profit determined by allowance held at end of
  period
• Stock assumed to be in steady state under TAC
• Trade using a double auction
• Series of 4 periods repeated three times
• Subjects earnings paid to them in cash
• Average 23, range 11-33 for about 2 hours

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Results

• Prices only weakly reflect marginal value of
  allowance
• Evidence for speculative bubbles
• Subjects reported within-period speculating
• Weak bubble-shaped price patterns across periods

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Results

• Prices only weakly reflect marginal value of
  allowance
• Evidence for speculative bubbles
• Subjects reported within-period speculating
• Bubble-shaped price patterns across periods
• Price discovery is very hard
• Noisy market with large number of trades
• Parallels FL, NZ experience where price discovery
  was poor and many fishers became unhappy with
  program

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Market with Initial Lease

• In first round of trading, allow only leasing
• Trades do not carry over from one period to the
  next

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What Have We Learned?

• In cap-and-trade markets
• Newly created asset markets can be highly
  volatile
• Initial lease periods facilitate price discovery
• Rules of trade do affect outcomes
• Policymakers must include institutional effects
  in analysis of new policies
• Value of past experiences may be limited to
  institution
• Identify institution which works well, rather
  than restricting on which does not
• Provides new degree of freedom for controlling
  outcomes

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Market Design Elements

• Pre-trading price signals
• Leasing periods, or auctions
• Multi-market
• Simultaneous markets for joint or substitute
  products
• Simultaneous lease markets
• Two-pie systems
• What is traded Leases, poundage, shares, inputs
• What is the currency Money, catch shares
• Experiments can be useful in assessing
  institutions
• Policy analysts need new tool because no received
  theory
• Experiments may be best available science

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