Kyoto University,
Graduate School of Economics
Research Project Center Discussion Paper Series

Fisheries Subsidies and Management in Open Economies

Naoto Jinji

Discussion Paper No. E-11-004

Research Project Center
Graduate School of Economics
Kyoto University
Yoshida-Hommachi, Sakyo-ku
Kyoto City, 606-8501, Japan

October 2011

Fisheries Subsidies and Management in Open Economies∗
Naoto Jinji†
Kyoto University
This version: September 28, 2011

Abstract
The WTO members are conducting negotiations to clarify and improve disciplines on ﬁsheries
subsidies at the Doha Round. In this paper, I investigate how worldwide subsidy reform in theﬁsheries sector could aﬀect ﬁsheries output and resource stocks in a trading equilibrium. I demonstrate that the eﬀects of a reduction in subsidies on ﬁsheries output will diﬀer, depending on theconditions of the economy and ﬁsheries management in diﬀerent countries. A possible outcome ofa reduction in non-capacity-enhancing subsidies is that ﬁsheries output will rise in countries wherecatch quotas are not enforced and remain the same in countries where catch quotas are strictly
enforced, expanding the total supply of ﬁsheries products in the short run. In the long run, theworld ﬁsheries resource stock may be reduced.
Keywords: ﬁsheries; subsidies; WTO; SCM Agreement; variable labor supply.
JEL classification: F13; F18; Q22; Q27∗ This paper is a revised version of the paper entitled “Subsidies, Fisheries Management, and International Trade”(RIETI Discussion Paper Series No. 10–E-023). I would like to thank Kenzo Abe, Masahisa Fujita, Tsuyoshi Kawase,
Yoshizumi Tojo, Ryuhei Wakasugi, Nobuyuki Yagi, the members of the research project “Study on the WTO’s SCM
Agreement” at the Research Institute of Economy, Trade and Industry (RIETI), and two anonymous referees for helpfulcomments and suggestions on earlier versions of the paper. Financial support from the Japan Society for the Promotionof Science under the Grand-in-Aid for Scientiﬁc Research (C) (No. 21530221) is gratefully acknowledged. Any remaining
errors are my own.
† Faculty of Economics, Kyoto University, Yoshida-honmachi, Sakyo-ku, Kyoto 606-8501, Japan. Phone & fax: +8175-753-3511. E-mail: jinji@econ.kyoto-u.ac.jp.

11Introduction

Enormous amounts of money have been spent worldwide on subsidies for the ﬁsheries industries. Manyof those subsidies are possibly detrimental to resource conservation and management (Clark et al., 2005).
This is mainly because the subsidies support overcapacity in the ﬁsheries.
While it is not easy to deﬁne and obtain accurate data on ﬁsheries subsidies, some estimates areavailable.1 According to the Organisation for Economic Co-operation and Development (OECD 2006),
government ﬁnancial transfers (GFTs) to marine capture ﬁsheries in OECD countries amounted to
US$6.47 billion in 2003. This represented about 20% of the value of world production (i.e., landings) in
the industry. Most of the GFTs were devoted to management, research, and enforcement (38.8%, $2,508
million) and infrastructure (35.0%, $2,263 million). Funds were also spent on decommissioning schemes(6.7%, $432 million), income support (6.7%, $435 million), investment and modernization (3.2%, $206
million), access payments (3.0%, $194 million), and other cost-reducing transfers and direct payments(7.0%, $454 million). The last item includes price support schemes.
Based on case studies of Japan, the European Union, Norway, the United States, Russia, and China,
Milazzo (1998) estimates the aggregate level of subsidies to ﬁsheries in the world as US$14.0–20.5 billion
annually.2 He categorizes ﬁsheries subsidies into (i) budgeted subsidies, (ii) unbudgeted subsidies, (iii)cross-sectoral subsidies, (iv) conservation subsidies, and (v) resource rent subsidies.3
Khan et al. (2006) and Sumaila et al. (2006) provide another estimate. Khan et al. (2006)
estimate global non-fuel ﬁsheries subsidies for 11 subsidy types from the database of subsidy programs
reported in marine capture ﬁsheries for 144 coastal countries (both developed and developing countries)
from 1995 to 2005. They estimate that global non-fuel subsidies are US$25.7 billion annually. About
49% (US$12.7 billion) is provided by 38 developed countries and the remaining 51% (US$13.0 billion)
by 103 developing countries. In developed countries, subsidies for ﬁsheries management programs andservices are the major program (US$5.1 billion). In developing countries, on the other hand, ﬁshing port
construction and renovation programs (US$7.3 billion) and ﬁshery development projects and support
services (US$2.2 billion) are the major programs.
The use of ﬁsheries subsidies is discussed at the World Trade Organization (WTO). Members of the
WTO are currently conducting negotiations to clarify and improve disciplines on ﬁsheries subsidies in
the Rules Negotiations at the Doha Round (WTO 2007, 2008, 2011). At present, there are no speciﬁc
regulations on ﬁsheries subsidies in the WTO. The new regulations on ﬁsheries subsidies are planned
1 For detailed discussion on how to deﬁne ﬁsheries subsidies, see OECD (2006) and Khan et al. (2006).
2 Data include diﬀerent years in the 1990s.
3 Budgeted subsidies include development grants, state investments, foreign access payments, market promotion, andprice supports. Unbudgeted subsidies include subsidized loans, fuel tax exemptions, and income tax deferrals. Crosssectoral subsidies include aids to shipbuilding and aids to ﬁsheries infrastructure. Conservation subsidies include vessel
and ﬁshing permit buybacks, stock enhancement, and R&D in clean harvesting gear. Finally, resource rent subsidies
include user fees.

2

as additions to the Agreement on Subsidies and Countervailing Measures (SCM Agreement) as Annex
VIII. In the negotiations, the prohibition on certain forms of ﬁsheries subsidies that may contribute toovercapacity and overﬁshing was proposed. At the same time, the establishment of appropriate andeﬀective special and diﬀerential (S&D) treatment for developing and least-developed countries is also
discussed in the new regulations. In the draft of the new regulations (WTO 2007), exceptions (bothgeneral and S&D) are conditioned upon the establishment and operation of ﬁsheries management systems and measures. It is, however, controversial whether the WTO, which is not a ﬁsheries management
organization, should use binding conditionality concerning ﬁsheries management.4
The main purpose of this paper is to analyze how ﬁsheries subsidies will aﬀect the incentive ofpeople in the ﬁsheries sector. I consider two types of subsidies: one type is subsidies for income support;
another type is subsidies for price supports that raise the domestic producer price of ﬁsheries products.
In the Draft Consolidated Chair Texts of the AD and SCM Agreements (WTO 2007), which is the basis
for negotiations at the Doha Round, these two types of subsidies are included in subsidies that should
be prohibited.5 Thus, an analysis of those subsidies could provide some implications for negotiations
at the WTO. I illustrate how the eﬀects of reducing existing subsidies on ﬁsheries output will diﬀer,
depending on the conditions of the economy. I construct a simple model of two sectors: ﬁsheries andmanufacturing. A key element is variable labor supply. Each worker chooses the optimal supply of laborby taking into account the substitution between consumption of goods and leisure.
The main results are as follows. First, in a small open economy (SOE) where catch quotas are
not enforced and there are no alternative employment opportunities for workers in the ﬁsheries sector,
a permanent reduction in subsidies for income support will increase ﬁsheries output in the short run.
This is because workers in the ﬁsheries sector try to partially oﬀset reductions in income from cuts in
subsidies by increasing labor, which results in a longer time spent ﬁshing. In the long run, the subsidy
cut reduces the steady-state ﬁsh stock due to increased ﬁshing. A reduction in subsidies for raising thedomestic producer prices of ﬁsh has a similar eﬀect if the elasticity of substitution between leisure andthe aggregate consumption goods is low. Second, in an SOE where catch quotas are strictly enforced
and there are alternative employment opportunities for workers in the ﬁsheries sector, a permanent
reduction in ﬁsheries subsidies has no eﬀect on total ﬁsheries output or on the steady-state ﬁsh stock aslong as catch quotas are binding. A further reduction in ﬁsheries subsidies may cause catch quotas to be
no longer binding. In such a case, a reduction in subsidies reduces ﬁsheries output both in the short run
and in the long run and may increase the steady-state level of ﬁsh stock. Third, in the trade between
4 The present situation of the negotiation is “too little convergence on even the technical issues, and indeed virtuallynone on the core substantive issues” (WTO 2011, p. 1). There has been no progress in the negotiation since WTO (2011)
was circulated in April 2011.
5 In the Chair Texts, Annex VIII (pp. 87–93) of the SCM Agreement addresses ﬁsheries subsidies. In Article I.1,
“income support for natural or legal persons engaged in marine wild capture ﬁshing” and “price support for products ofmarine capture ﬁshing” are identiﬁed as (e) and (f) of subsidies that shall be prohibited (WTO 2007).

3

two countries, the world relative price of ﬁsheries product is endogenously determined and hence isaﬀected by any change in ﬁsheries subsidies. If the relative supply of ﬁsheries product increases, then
the world relative price will decrease. This indirect eﬀect through price changes reinforces the direct
eﬀect of reducing ﬁsheries subsidies. Consequently, even in the case of trade between two countries,
subsidy reform that reduces either income supports or price supports can expand the world catch of ﬁshin the short run. In the long run, the world ﬁsh stocks will be reduced by the subsidy reform unless theprice change is large. The results in this paper suggest that proper management of ﬁsheries resources
is important for subsidy reform to mitigate overﬁshing and conserve ﬁsheries resources.
A number of existing studies are relevant to this paper. Munro and Sumaila (2002) and Clark, Munro,and Sumaila (2005) investigate the possible negative eﬀects of subsidies for vessel decommissioning
schemes. Both papers demonstrate that buyback subsidies generally have a negative impact on resource
conservation, if they are anticipated by ﬁshers. Lindebo (2005) examines the impact of the EU’s ﬂeet
capacity policy. He argues that the misguided use of subsidies for ﬂeet renewal and modernization in
the past sent the wrong signal to ﬁshers, but capacity-reducing subsidies had also achieved little successwith regard to the long-term, sustainable use of ﬁsheries resources.
The rest of the paper is organized in the following way. In section 2, I set up the basic frameworkof the analysis. In section 3, I examine the situation of ﬁsheries sector in the long run. In section 4, I
analyze the eﬀects of reducing ﬁsheries subsidies in a small open economy in which the world relative
price is exogenously given. In section 5, I extend the analysis to trade between two countries. In section
6, I state some concluding remarks.

2

The Basic ModelIn this section, I construct a simple model of worker behavior with a variable supply of labor.6 There
are two goods: ﬁsh, F , and manufactures, M . Take good M as a numeraire and let the price of good
M be one. Denote the price of ﬁsh as p.
There are N persons, indexed by i = 1, . . . , N . Each is endowed with x̄ units of labor and suppliesxi units of labor. Those persons endogenously supply labor to either the ﬁsheries sector or the manufacturing sector. Note that Li ≡ x̄ − xi denotes the leisure of person i. Let us consider the ﬁsheries
sector ﬁrst. Suppose that the current ﬁsheries resource stock is S. The natural growth rate of the ﬁsheries stock is given by G(S). As is usual in the literature of ﬁshery economics, I use a logistic function:
G(S) = rS(1−S/K), where r > 0 is the intrinsic growth rate and K is the carrying capacity. By devotingxi units of labor to ﬁshing, a person can obtain Fi = Ei (xi ; F−i , S) units of ﬁsh, where F−i = j=i Fj .
I assume that Ei (0; F−i , S) = 0, Ei ≡ ∂Ei (xi ; F−i , S)/∂xi > 0, and Ei ≡ ∂ 2 Ei (xi ; F−i , S)/∂x2i < 0.
6 The basic structure of my model is similar to Chichilnisky’s (1994) model of resource extraction by workers from thesubsistence sector.

4

I also assume that ∂Ei (xi ; F−i , S)/∂F−i < 0 and ∂Ei (xi ; F−i , S)/∂S > 0. In order to obtain explicit
solutions, I use a particular functional form for Ei (xi ; F−i , S):
Fi = (γS − F−i )(1 − e−xi ),where γ > 0 is a constant parameter. Denote that the total catch of ﬁsh as F =(1)ni=1 Fi , where n ≤ N

is the number of persons who engage in ﬁshing. Then, the net change in the resource stock is the natural
growth rate minus the total harvest:
Ṡ = G(S) − F.

(2)

Person i in the ﬁsheries sector chooses xi , taking other ﬁshers’ total catch of ﬁsh F−i as a given. Thus,
I calculate the Nash equilibrium level of ﬁsh output, FiN . By imposing symmetry, (1) is rewritten as
FiN = (γS − (n − 1)FiN )(1 − e−xi ),which can be solved for FiN :FiN =γ(1 − e−xi )S.
n − (n − 1)e−xi(3)

The total output of ﬁsh in the Nash equilibrium is hence given by
F N = nFiN =nγ(1 − e−xi )S.
n − (n − 1)e−xi(4)Then, in the short run (i.e., when S is ﬁxed), I have
∂F N
nγe−xi )=S > 0.
∂xi(n − (n − 1)e−xi )2(5)

Thus, an increase in xi raises the total output of ﬁsh.
In the manufacturing sector, on the other hand, “human capital” is used as a production factor.
Person i’s supply of human capital is hi xi , where hi is a parameter speciﬁc to the person and is a draw
from distribution Ω(h) with support on [0, h̄]. One unit of good M is produced by a units of humancapital. This implies that the wage w per unit of human capital in the manufacturing sector is given by
w = 1/a (Recall that good M is the numeraire). Thus, income for those employed in the manufacturingmsector is given by hi xi /a. The production of good M is given by M = i=1 hi xi /a, where m ≤ N is
the number of persons employed in the manufacturing sector.
To simplify the analysis, I assume that each person can only work in one sector. Consumer tastes
for consumption goods are quasi-concave and weakly separable across the set of consumption goods andleisure.7 Utility of consumer i is given by
ui = u(φ(f, m), x̄ − xi ),7 The assumption of weak separability between consumption goods and leisure is popular in the literature of public

economics. See, e.g., Bovenberg and de Mooij (1994).

5where φ(f, m) is a linearly homogenous sub-utility function, and u is strictly increasing and strictly
quasi-concave in φ and Li .
I assume that people are myopic in the sense that they maximize their current-period utility in eachperiod. This means that when a person engages in ﬁshing, he decides the optimal level of xi by taking
the ﬁsh stock S as a given and ignoring the eﬀect of xi on the change in S. The reason why I takethis approach is that overexploitation of renewable natural resources is mainly caused by short-sighted
behavior of people.8 Thus, it is important to see the eﬀects on the incentives for short-sighted people.
Person i chooses m, f , and xi to maximize ui subject to the budget constraint: pf + m ≤ I i , whereI i is income. When person i earns income in the ﬁsheries sector, the income is given by I i = qFi + t − τ ,where q = p + s is the domestic producer price of ﬁsh with s being subsidies to support the domestic
price, t is income support from the government, and τ is the lump-sum tax. When the person earns
income in the manufacturing sector, on the other hand, income is given by I i = whi xi − τ . The
government’s budget is balanced by spending the diﬀerence between tax revenue and subsidy payments
as government expenditure g. Thus, τ is constant and unaﬀected by any changes in subsidy payments.
Since φ(·) is linearly homogenous, it yields
ui = u(I i /β(p), x̄ − xi ),(6)

where β(p) is the true price index associated with φ(·).
When person i engages in ﬁshing, the optimal supply of labor is determined by maximizing Eq. (6)subject to I i = qFi + t − τ . The ﬁrst-order condition (FOC) is given byuφq
E  − uL = 0,β(p) iwhere uφ ≡ ∂ui /∂φ and uL ≡ ∂ui /∂(x̄ − xi ). The second-order condition (SOC) is given byq∂ 2 ui
q
q


u
=
−
2u
E
E
E  + uLL ≡ Δ,
φφ
Lφ + uφ∂x2iβ(p) iβ(p) iβ(p) i(7)(8)

where uφφ ≡ ∂ 2 ui /∂φ2 , uLφ ≡ ∂ 2 ui /∂(x̄ − xi )∂φ, and uLL ≡ ∂ 2 ui /∂(x̄ − xi )2 . I assume that Δ < 0 sothat the SOC is satisﬁed.
When person i is employed in the manufacturing sector, on the other hand, the optimal supply oflabor is determined by maximizing Eq. (6) subject to I i = whi xi − τ . The FOC is given byuφhi− uL = 0.
a(9)Denote xi that satisﬁes Eq. (9) by x̃i . The SOC is given by


hi
hi
∂ 2 ui=uφφ − 2uLφ + uLL .
∂x2i
aa
8 Studies on open-access renewable resources demonstrate this mechanism. See, for example, Gordon (1954) and Brander

and Taylor (1997).

6

I assume the right-hand side is negative so that the SOC is satisﬁed.
i
The FOCs (7) and (9) yield the demand functions for leisure Lfi ∗ (p, q, I i ) and Lm∗i (p, w, I ) when aperson works in sectors F and M , respectively. As is usually the case, I assume that leisure is a normaliigood in both cases, i.e., ∂Lfi ∗ (p, q, I i )/∂I i > 0 and ∂Lm∗i (p, w, I )/∂I > 0.

3

Fisheries Stock and Output in the Long Run

Based on the set-up in the previous section, I analyze the situation of the ﬁsheries sector in the longrun. I focus on the analysis in steady states. Denote the Nash equilibrium level of total ﬁsh output inNand the steady-state level of ﬁsheries stock by Sss . Then, from (2) a steady statesteady states by Fss

is given by Ṡ = 0, orN= rSss (1 − Sss /K).
Fss

Substitute (4) into (10) to yield the steady-state level of ﬁsheries stock:nγ(1 − e−x̂i )Sss = K 1 −,r(n − (n − 1)e−x̂i )

(10)

(11)

where x̂i satisﬁes (7). Then, I have∂SssKnγe−x̂i
=−
< 0.
∂ x̂i
r(n − (n − 1)e−x̂i )2
Thus, an increase in x̂i unambiguously reduces the ﬁsheries stock in steady states.
As is well known, the eﬀect of a change in the steady-state level of ﬁsh stock on the ﬁsh output insteady states depends on the size of the stock. Diﬀerentiate (10) with respect to Sss to yieldN∂Fss= r(1 − 2Sss /K).
∂Sss
N
N
Thus, ∂Fss/∂Sss > 0 if Sss < K/2 and ∂Fss/∂Sss < 0 if Sss > K/2. Note that S = K/2 is known as

the maximum sustainable yield (MSY) level of resource stock. The eﬀect of an increase in xi on the
total ﬁsh output in steady states is then given by



N
∂Fss
∂Sss
2
= r 1 − Sss
.
∂ x̂i
K
∂ x̂i
N
N
Since ∂Sss /∂ x̂i < 0, it yields that ∂Fss/∂ x̂i < 0 if Sss < K/2 and ∂Fss/∂ x̂i > 0 if Sss > K/2. Thus,

unlike in the short run (i.e., (5)), an increase in xi reduces the total output of ﬁsh in steady states if
Sss < K/2, or if the ﬁsheries stock is over-exploited. The following proposition summarizes the results.
Proposition 1 An increase in x̂i always reduces the ﬁsheries stock in steady states. On the other hand,an increase in x̂i reduces (resp. raises) the total output of ﬁsh in steady states if the ﬁsheries stock isover-exploited, or Sss < K/2 (resp. not over-exploited, or Sss > K/2).
When is the ﬁsheries stock over-exploited? From (11), it is easy to show that Sss < K/2 holds if
γ > r/2

andx̂i > log(2nγ − (n − 1)r) − log n(2γ − r),hold, where x̂i satisﬁes (7).
7

(12)

4

Fisheries Subsidies in a Small Open Economy

Now, I examine how a reduction in existing ﬁsheries subsidies will aﬀect ﬁsheries stock and output bothin the short run and in the long run. The main purpose of this section is to illustrate that the eﬀects ofreducing ﬁsheries subsidies on ﬁsheries output are dependent on the economy. I consider two types ofsubsidies. The ﬁrst is income supports for workers in the ﬁsheries sector. The second is price supports
for ﬁsh products. In this analysis, I consider two cases. The ﬁrst case is that catch quotas are notenforced and there are no alternative employment opportunities for workers in the ﬁsheries sector. The
second case is that catch quotas are strictly enforced and there are alternative employment opportunities
for workers in the ﬁsheries sector.
In this section, I assume that the country is small in the international market.

4.1

Unenforced catch quotas and no alternative employment opportunities

I ﬁrst consider the case where catch quotas are not enforced and there are no alternative employment
opportunities for workers in the ﬁsheries sector. There are no alternative employment opportunities forworkers in the ﬁsheries sector if the country is completely specialized in producing good F .
Let F̄ be the catch quota. If the total catch is below F̄ without enforcement, there is no problem.
Thus, the implicit assumption in this subsection is that the total catch is greater than F̄ even in theabsence of ﬁsheries subsidies.
A reduction in income support is measured by a reduction in t. This is qualitatively the same as
an exogenous reduction in non-labor income. I consider a permanent reduction in t. This change does
not aﬀect consumption allocation between good F and good M . However, it does aﬀect the level ofconsumption of leisure. Since leisure is a normal good, a reduction in income leads to a reduction inleisure for an individual person. This implies that the person is willing to spend more time ﬁshing. Thiseﬀect can be obtained by totally diﬀerentiating the FOC for the optimal supply of labor (Eq. (7)):


dxi
1
q

−
=
E − uLφ > 0.
(13)
uφφ
dt
β(p)Δ
β(p) i
Note that Δ < 0 by the SOC, uφφ < 0, Ei > 0, and uLφ < 0. The overall sign of the terms in thesquare brackets is negative under the assumption that leisure is a normal good. This result implies thata reduction in t decreases Li and increases xi . This is true for all workers who engage in ﬁshing, andall workers in the economy work in the ﬁsheries sector.
Then, since from (5) an increase in xi also increase the ﬁsh output in the short run, it yields that a
reduction in t unambiguously increases the ﬁsh output in the short run. In the long run, by contrast,
Proposition 1 implies that the eﬀect of a reduction in t on the steady-state ﬁsh output depends on theconditions, while the steady-state ﬁsh stock is unambiguously reduced by a reduction in t through anincrease in xi . If conditions (12) are satisﬁed, a reduction in t decreases the steady-state ﬁsh output.

8

Otherwise, it increases the ﬁsh output in steady states. These results are summarized in the following
proposition.
Proposition 2 In a small open economy (SOE) where catch quotas are not enforced and there are
no alternative employment opportunities for workers in the ﬁsheries sector, a permanent reduction inincome support t leads to greater ﬁsh output in the short run. In the long run, it reduces the steadystate ﬁsh stock. It also reduces the steady-state ﬁsh output if conditions (12) are satisﬁed. Otherwise, apermanent reduction in t leads to greater steady-state ﬁsh output.
This proposition demonstrates the possibility that a reduction in ﬁsheries subsidies in the form of income
support worsens the situation of over-exploited ﬁsheries resources.9
Figures 1 and 2 illustrate the eﬀects of a reduction in ﬁsheries subsidies on ﬁsh stock and output inthe short run and in the long run. The case in which conditions (12) are satisﬁed is depicted in Figure
1. This corresponds to the case of over-exploited ﬁsheries resources. The horizontal axis measures thelevel of ﬁsh stock, S. The inverted-U shape curve is the logistic growth equation, G(S). The solid
upward-sloping line is the total catch schedule, F N (S). The current stock level is St and the currentﬁsh output is FtN . Since the current level of catch is higher than the natural growth rate, the stock
shrinks toward the steady-state level, Sss Then, consider a reduction in t. Since it increases x̂i , it shifts
the F N line up, as illustrated by a upward-sloping broken line. While the current output is higher, Sss
N
shifts to the left and the steady-state level of output, Fss, falls. On the other hand, Figure 2 illustrates

the case in which ﬁsheries resources are not over-exploited. As in the previous case, a reduction in tNshifts up the F N line and leads to greater current output. However, the steady-state output, Fss, isalso greater, despite the lower level of steady-state ﬁsh stock.
I next consider a permanent reduction in subsidies s. Since ds = dq, a reduction in s is equivalent
to a reduction in q. The eﬀects of this price change on the optimal supply of labor can be decomposed
as follows:
−



Fi
dxi
Ei
q
= uφ
+
Ei − uLφ .
uφφdsβ(p)Δ β(p)Δ
β(p)

(14)

In the above equation, the ﬁrst term represents the substitution eﬀect between leisure and aggregate
consumption goods. This term is negative because Δ < 0 and uφ > 0, implying that a reduction ins will decrease the optimal supply of labor. Since a reduction in s decreases the opportunity cost ofleisure, it is optimal for a person to increase leisure and hence to decrease the supply of labor.
The second block of terms, including terms in the square brackets in Eq. (14), measures the income
eﬀect, which is positive. The reason is the same as that in Eq. (13). Since a reduction in s decreases
nominal income and since leisure is a normal good, then a reduction in s decreases leisure and hence
9 This result implies that ﬁsheries subsidies in the form of income support actually work as a subsidy by which ﬁshermen

are bribed to catch ﬁsh less. This mechanism is quite similar to that of the subsidy program for farmers to take land outof agricultural production. I would like to thank an anonymous referee for pointing out this implication.

9

increases the supply of labor. Therefore, the overall eﬀect depends on the relative size of these two
eﬀects. Actually, if the elasticity of substitution between leisure and aggregate consumption goods isless than one, the substitution eﬀect is relatively small. In such a situation, the substitution eﬀect isdominated by the income eﬀect and hence a reduction in s increases the supply of labor. The eﬀects ofa reduction in s on the ﬁsheries stock and output are then similar to those in Proposition 2.
Proposition 3 In an SOE where catch quotas are not enforced and there are no alternative employment
opportunities for workers in the ﬁsheries sector, a permanent reduction in subsidies s leads to greaterﬁsh output in the short run if the elasticity of substitution between leisure and aggregate consumption
goods is less than one. In such a case, a permanent reduction in s reduces the steady-state ﬁsh stock.
It also reduces the steady-state ﬁsh output if conditions (12) are satisﬁed. Otherwise, it leads to greater
steady-state ﬁsh output.
Thus, as long as the elasticity of substitution between leisure and aggregate consumption goods is lessthan one, the eﬀects of a reduction in s are similar to those of a reduction in t.

4.2

Enforced catch quotas and the presence of alternative employment opportunities

I now turn to the case in which catch quotas are strictly enforced and there are alternative employment
opportunities for workers in the ﬁsheries sector. The country is diversiﬁed, and workers can move acrosssectors under the conditions speciﬁed in the previous section.
A catch quota, F̄ , is binding in each period if F̄ ≤ F =ni=1 Fi .

Under the binding quota, theoutput per person is simply given by dividing the quota by the number of workers in the ﬁsheries sector.
As was described in the previous section, the sectoral allocation of workers is determined by the
relative level of individual income in the two sectors. As long as the catch quota is binding, the numberof persons who work in the ﬁsheries sector, n, is endogenously determined byhi x̃i
pF̄
+t≥
n
a

for

i = 1, . . . , n,(15)where x̃i on the right-hand side satisﬁes Eq. (9). If the catch quota is not binding, n is determined bypEi (x̂i ) + t ≥hi x̃iafor

i = 1, . . . , n,(16)

where x̂i on the left-hand side satisﬁes Eq. (7).
Now, consider a permanent reduction in t. If the catch quota is binding in each period, as is
obvious from Eq. (15), n decreases because those who have relatively higher human capital move tothe manufacturing sector. Consequently, a reduction in t increases the quota per person. However, as
long as F̄ ≤ nEi (x̂i ) holds, the total output of the ﬁsheries sector remains the same in the long run
as well as in the short run. The steady-state level of the ﬁsheries stock also remains the same. Thus,10

a reduction in t has no impact on the ﬁsheries stock and output at all. The situation is illustrated in
Figure 3. In this ﬁgure, the horizontal line indicated as F = F̄ represents the catch quota. The currentﬁsh stock is at St . At this stock level, the unregulated total catch is at FtN , which is higher than thecatch quota F̄ . Thus, as long as the quota is strictly enforced, the actual total catch is F = F̄ . The
resource dynamics leads to the steady-state stock level, Sss . The actual total catch remains the same
throughout the transition to the steady state. Then, although a reduction in t shifts the unregulatedﬁshing schedule down, the unregulated total catch is still above the quota level. As a result, it has no
impact on the ﬁsh output and hence the steady-state stock level also remains the same.
However, a further reduction in t may cause F̄ > nEi (x̂i ) to hold. If that is the case, then the total
output becomes lower both in the short run and in the long run. Since the pressure on the ﬁsheries
resource becomes weaker, the steady-state level of the ﬁsheries stock increases. The following propositionsummarizes the above analysis.
Proposition 4 In an SOE where catch quotas are strictly enforced and there are alternative employment
opportunities for workers in the ﬁsheries sector, a small permanent reduction in income support t has
no impact on the ﬁsheries output both in the short run and in the long run and on the steady-state levelof ﬁsh stock if the catch quota is initially binding. A further reduction in t may decrease the total ﬁsh
output both in the short run and in the long run and may increase the steady-state level of ﬁsh stock.
Consider next a permanent reduction in subsidies s. If the catch quota is binding, the number of
persons working in the ﬁsheries sector, n, is endogenously determined byq F̄
hi x̃i≥nafor i = 1, . . . , n.

(17)

If the catch quota is not binding, on the other hand, n is determined byqEi (x̂i ) ≥hi x̃iafor i = 1, . . . , n,(18)Note that since s aﬀects x̂i , in (18) Ei (x̂i ) also changes in response to a change in s. Otherwise, theeﬀects of a reduction in s are qualitatively similar to those of a reduction in t.
Proposition 5 In an SOE where catch quotas are strictly enforced and there are alternative employment
opportunities for workers in the ﬁsheries sector, a small permanent reduction in subsidies s has no impact
on the ﬁsh output both in the short run and in the long run and on the steady-state level of ﬁsh stock if
the catch quota is initially binding. A further reduction in s may decrease the total ﬁsheries output bothin the short run and in the long run and may increase the steady-state level of ﬁsh stock.
Unlike the case in the previous subsection, as long as the catch quota is properly set and strictly
enforced, ﬁsh stocks are maintained in the long run. However, it is sometimes stated that catch quotas
are set at levels that result in overﬁshing. This means that in the case illustrated in Figure 3 the locusof the F = F̄ line is above FtN . If that is the case, the ﬁsheries stocks can be reduced even if catch11

quotas are strictly enforced. Thus, it is important to note that the results in Propositions 4 and 5 do
not guarantee that the ﬁsheries resource stocks in this country are maintained at the appropriate level.

5

Subsidy Reform in Two-Country Trade

In this section, I extend the analysis to the case of trade between two countries. There are two countries:
Home and Foreign. The basic structure of the economy in the previous sections is retained for bothcountries. Variables in Home are indicated with no asterisk and those in Foreign are indicated withan asterisk (∗). In order to simplify the analysis, I assume that ﬁsheries resource stock exists in eachcountry and that there is no interaction between the resource stocks in the two countries. Consider thecase in which Home has a comparative advantage in producing good M and Foreign has a comparativeadvantage in producing good F . More speciﬁcally, I impose the following assumption.
Assumption 1 Under free trade without subsidies, Home is diversiﬁed and Foreign is completely specialized in producing ﬁsh in steady-state equilibrium.
Under this assumption, Home exports good M and imports good F and Foreign exports good F andimports good M . Moreover, world demand (i.e., total demand in the two countries) for good F is
suﬃciently strong to require that even Home, which has a comparative disadvantage in producing goodF , produces good F in the trading equilibrium.
I also assume that in Foreign the ﬁsheries stock is over-exploited:∗
Assumption 2 In Foreign, conditions (12) are satisﬁed so that Sss< K/2 holds.

Moreover, with respect to the enforcement of catch quotas in the ﬁsheries sector, I assume
Assumption 3 Catch quotas are strictly enforced in Home but are not enforced at all in Foreign.
Consider a situation in which subsidies for income support t is initially provided in each country (ands = s∗ = 0). Since the subsidies encourage workers to enter the ﬁsheries sector, Foreign continues tospecialize in producing ﬁsh. In order for Home to produce both goods t must satisfy pF̄ /n + t < hj x̃j /afor some j and n < N .
Now consider subsidy reform where t is permanently reduced (but is still positive after the reform)in both countries. From Proposition 2, I know that under Assumption 2 in Foreign a reduction in t∗
increases ﬁsheries output in the short run and decreases it in the long run, holding p constant. From
Proposition 4, for a given p a reduction in t keeps ﬁsheries output constant or may decrease it in Home.
In the framework of two-country trade, however, a change in t and t∗ can also aﬀect the world relative
price p. I impose the following assumption.
Assumption 4 In Home, the catch quota in the ﬁsheries sector is binding even after a reduction in t.

12

Under this assumption, a reduction in t does not aﬀect the world supply of ﬁsh. On the other hand, areduction in t∗ unambiguously increases the world supply of ﬁsh in the short run for a given p. Thus,
it causes p to fall. From Proposition 3, this price change further increases ﬁsh output in Foreign if theelasticity of substitution between leisure and aggregate consumption goods is less than one. In the longrun, by contrast, a reduction in t∗ reduces the world supply of ﬁsh for a given p. Thus, it increases p insteady states. The overall eﬀect in Foreign can be obtained by totally diﬀerentiating Eq. (7):




p
p
dx∗
1
1
Ei − uLφ +Ei − uLφ− ∗i =
uφφ
uφφ
dt
β(p)Δ
β(p)
β(p)Δ
β(p)




i∗ 

dp
I β (p)pβ (p)
× Ei −.
+ uφ Ei 1 −
β(p)
β(p)
dt∗

(19)

In the right-hand side, the ﬁrst block of terms, including those in the ﬁrst square brackets, represents
the direct eﬀect of a change in t∗ on x∗i . As was discussed for Eq. (13), the sign is positive. The terms
in the second square brackets represent the indirect eﬀects through a change in p. In the second square
brackets, there are two elements. The ﬁrst element measures the income eﬀect. The income eﬀect
captures both the eﬀect due to a change in the nominal income and the eﬀect due to a change in theprice index that aﬀects real income. As long as t∗ is suﬃciently small, the income eﬀect works toincrease the supply of labor. The second element measures the substitution eﬀect between leisure andconsumption goods. Although an increase in p increases both the opportunity cost of leisure (pEi ) andthe price of aggregate consumption goods (β(p)), the relative price of leisure to consumption goods
increases. This result is obtained from the property β  (p) < β(p)/p that comes from the concavity ofβ(p). Consequently, the second element is negative, meaning that the substitution eﬀect works to reduce
the supply of labor. As was discussed in Eq. (14), if the elasticity of the substitution between leisureand aggregate consumption goods is less than one, the substitution eﬀect is dominated by the income
eﬀect and hence a reduction in p increases the supply of labor. Since −dp/dt∗ < 0 in the short run, theoverall eﬀect of the indirect eﬀect is positive and hence the indirect eﬀect reinforces the direct eﬀect. In
the long run, by contrast, −dp/dt∗ > 0 holds and hence the indirect eﬀect is negative. Consequently,
the overall eﬀect is ambiguous. However, as long as the price change is relatively small and the direct
eﬀect dominates the indirect eﬀect, −dx∗i /dt∗ > 0 still holds.
In Home, on the other hand, since a drop in t has no eﬀect on xi as long as the catch quota isbinding, it has no impact on the ﬁsheries output and stock. Thus, the following result is obtained.
Proposition 6 When Home and Foreign are characterized by Assumptions 1, 2, 3, and 4 and tradewith each other, subsidy reform where t and t∗ are permanently reduced causes the world catch of ﬁsh toincrease in the short run if t∗ is initially suﬃciently small and if the elasticity of substitution between
leisure and aggregate consumption goods is less than one in Foreign. Although the impact of the subsidy
reform in the long run is ambiguous, the steady-state world ﬁsh stock decreases unless the price change
due to the subsidy reform is large.

13

Contrary to conventional wisdom, Proposition 6 shows that worldwide subsidy reform to reduce a typeof ﬁsheries subsidies could increase the world catch of ﬁsh in the short run. Moreover, since overﬁshing
may be intensiﬁed by the subsidy reform, the steady-state level of the world ﬁsheries stock may decrease.
This counterintuitive result mainly arises from the endogenous supply of labor. The condition that theelasticity of substitution between leisure and the aggregate consumption goods is less than one is actuallyplausible and rather general, as Chichilnisky (1994) discusses. Thus, the result of Proposition 6 is nota special case but a plausible case.
Subsidy reform to reduce subsidies s has a similar eﬀect. Suppose that initially s > 0, s∗ > 0
and t = t∗ = 0 in both countries. Then, consider a permanent reduction in s and s∗ . Similarly toAssumption 4, a change in s has no eﬀect on the world supply of ﬁsh under the following assumption:
Assumption 5 In Home, the catch quota in the ﬁsheries sector is binding even after a reduction in s.
I then focus on the analysis in Foreign. Recall that in the case of Eq. (14), a change in s∗ only changes
the domestic producer price q ∗ . When the world relative price of ﬁsheries product p is endogenously
determined, the domestic consumer price and the domestic producer price change due to a change inﬁsheries subsidies. Totally diﬀerentiate Eq. (7) and arrange terms to yield

 




1
q ∗ β  (p) dp
q ∗ Ei
dx∗
− uLφ
1+ 1−
− ∗i =
uφ Ei + Ei uφφ
ds
β(p)Δ
β(p)
β(p)
ds∗

(20)

Recall that Δ < 0 and from Eq. (14) the overall sign of the terms in the ﬁrst square brackets isnegative if the elasticity of substitution between leisure and aggregate consumption goods is less thanone. Moreover, since dp/ds∗ > 0 in the short run and β  (p) < β(p)/p, the overall sign of the second
square brackets is positive as long as s∗ is initially suﬃciently small. Thus, it yields that −dx∗i /ds∗ > 0
in the short run. Similar to the case of a reduction in t, the eﬀect through a change in p reinforces the
direct eﬀect of a change in s∗ in the short run. In steady states, on the other hand, dp/ds∗ < 0 may
hold. However, as long as the price change is relatively small, −dx∗i /ds∗ > 0 still holds. The following
proposition summarizes the results.
Proposition 7 When Home and Foreign, characterized by Assumptions 1, 2, 3, and 5, trade with eachother, subsidy reform that s and s∗ are permanently reduced causes the world catch of ﬁsh to increase in
the short run if s∗ is initially suﬃciently small and if the elasticity of substitution between leisure andaggregate consumption goods is less than one in Foreign. Although the impact of the subsidy reform in
the long run is ambiguous, the steady-state world ﬁsh stock decreases unless the price change due to thesubsidy reform is large.
Proposition 7 shows that the eﬀects of the subsidy reform that reduces s and s∗ on the ﬁsheries sector
are qualitatively similar to those of the reform that reduces t and t∗ . Under certain conditions, subsidy
reform may have unintended impacts on the ﬁsheries sector in the short run and in the long run.

14

6

Concluding Remarks

In this paper, I investigated the eﬀects of reducing existing subsidies in the ﬁsheries sector. The conventional wisdom is that ﬁsheries subsidies cause overﬁshing and hence a reduction in ﬁsheries subsidies
will contribute to mitigating overﬁshing and conserving ﬁsheries resources. Conversely, the analysis of
this paper suggests that under some conditions the opposite result may be true. That is, a reduction
in ﬁsheries subsidies may accelerate overﬁshing and reduce ﬁsheries resource stocks. The key is how
the change in subsidies will aﬀect the incentives of workers who engage in ﬁsheries. If a reduction in
subsidies causes workers to put more eﬀort into ﬁshing, it may yield unexpected and undesirable resultsin counties where ﬁsheries resources are not properly managed. Therefore, in designing new regulations
on ﬁsheries subsidies at the WTO, the eﬀects of reducing ﬁsheries subsidies should be carefully examined
after consideration of the conditions in diﬀerent countries. Strengthening ﬁsheries resource management
will ensure that subsidy reform mitigates overﬁshing and conserves ﬁsheries resources.
The focus of this paper was on the eﬀects of subsidies on ﬁsheries output and ﬁsh stocks. As mentioned in the introduction, however, the issue that subsidies contribute to the problems of overcapacity
and rent dissipation in the ﬁsheries sector is also important. A number of previous studies argue thatwhen harvest is restricted by a total allowable catch (TAC) quota and factor inputs are controlled,ﬁshermen have an incentive to hold overcapacity, which results in rent dissipation (Munro and Scott
1985; Cunningham and Gréboval 2001; Asche et al. 2009).10 In this situation, since subsidies increase
the incentive to hold overcapacity, a reduction in those subsidies will improve economic eﬃciency inﬁsheries sector.11 Although this issue is beyond the scope of this paper, the next step of the research is
to examine the impact of reducing subsidies on ﬁshing capacity and rent in the ﬁsheries sector.

10 Munro and Scott (1985) were the ﬁrst to refer this issue as the “Class II common property problem.” They argue that

this problem arises when the regulator prevents excessive exploitation of resources by imposing quotas but does not limit
the number of ﬁshermen competing for the restricted harvests. Rent dissipation emerges because there are an excessive
number of vessels and ﬁshermen competing for the limited harvests. Ward et al. (2004) discuss the diﬀerence between
excess capacity and overcapacity and technical details of estimating current and desired levels of ﬁshing capacity. Asche
et al. (2009) empirically investigate whether rent dissipates under individual vessel quota (IVQ) regulations.
11 I would like to thank an anonymous referee for directing my attention to this issue. Stone (1997) discusses diﬃculties ofassessing the eﬀects of subsidies on overcapacity. Lindebo (2005) analyzes the impact of subsidies on capacity developmentin the case of European Union’s ﬂeet capacity management.

15

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17

−xi

FN= nγ(1−e −x)i S
n−(n−1)e

FtN

FssN

G(S)=rS(1−S/K)

0

_
Sss K

St

2

K

S

Figure 1: The eﬀect of a reduction in ﬁsheries subsidies when ﬁsh is over-exploited

18

−xi

FN= nγ(1−e −x)i S
n−(n−1)e

FtN
FssN

0

G(S)=rS(1−S/K)

_
K
2

Sss

St

K

S

Figure 2: The eﬀect of a reduction in ﬁsheries subsidies when ﬁsh is not over-exploited

19

FN
FtN

_
F=F

_
F

0

_ St
K
2

Sss

K

S

Figure 3: The eﬀect of a reduction in ﬁsheries subsidies when catch quotas are enforced20