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Rights and fishes: How market design reels in better solutions

August 16, 2017
Innovation

  A new transformative science is upending traditional laissez-faire ideas

When NSW Minister for Primary Industry Niall Blair issued a directive in 2015 to reinvigorate the state’s fishing industry by reviewing access rights for fishing, a complex challenge arose.

From pippies on the beach to snapper in the ocean and estuarine fish, up for grabs would be potentially 103 different types of fishing rights (also known as shares), each defined by species, region and method of fishing.

With the lure of a $15.5 million subsidy to be divvied up as part of the government’s fishing reform package, some of NSW’s 1100 fishers would decide to sell all their long-held shares and leave the industry altogether, while others would want to buy more shares in particular classes – and many highly active industry players would want a whole lot more to allow them to grow their businesses.

Many questions arose: Who should get which type of shares, and how many? What’s the right price for these shares? How to ensure those who wanted to quit the industry (with its median age of 60+) would sell all their shares in every class? How much taxpayers’ money would it take to grease the wheels of change – and where would it be most effectively distributed?

'Market clearing and subsidy allocation had to be done in such a way that several prioritised objectives were met'

– JACOB GOEREE

It’s the sort of mind-boggling problem that excites and tests the mettle of market designers such as Jacob Goeree, a scientia professor and director of the AGORA Centre for Market Design at UNSW Business School.

By bringing together disciplines – including game theory from economics and optimisation theory from operations research – with the algorithms of computer science, such highly skilled scientists can create new kinds of markets designed to achieve specific goals.

Move over Adam Smith and your free-marketeers. Goeree and his colleagues around the world are pioneering a new transformative science that’s upending those 200-year-old ‘laissez-faire’ ideas.

A slice of the action

Goeree has previously designed markets for licences in the highly competitive field of broadband spectrum and for pollution permits in the US, but he says the level of complexity of the recently created fisheries market outstrips them all.

In May, working with the team at Fisheries NSW and with computer scientists in Munich, Goeree successfully ran a clearing house – a market in three rounds – to meet the ministerial goal of making the state’s fishing industry healthier.

The problem dated back to 2002, when new access rights had been distributed, mostly equally among the fishers of NSW. The hurdles to get the new rights were low and too many fishers got them. And the rights were non-binding, so those with a business licence effectively fished as much as they liked.

What sounded like a fair deal for all had created an industry in which more innovative and ambitious fishers had no way to get ahead. When they tried, less industrious counterparts dived in for a slice of the action.

On top of this, in some fishing co-operatives where ‘pool pricing’ was used, smart fishers who took extra care in handling their catch to deliver higher quality fish were paid on par with everyone else while others became ‘free-riders’.

In short, the incentives for competitiveness were missing, while there was the ever-present risk of overfishing from the surplus licences.

Following extensive consultation, Blair determined to enact the 1994 Fisheries Management Act’s original plan, which had never fully eventuated, for a ‘cap and close’ (cap and trade) system to cap the number of kilos of fish caught and the number of days permitted for fishing.

Such systems have been a huge part of international fisheries reforms, according to Doug Ferrell, director of fisheries analysis at Fisheries NSW. “They give regulators the ability to fine tune management – if there’s a sustainability issue, for example, you can control the quota,” he says.

But finding a way to fairly reallocate shares and adequately compensate exiting fishers presented a conundrum. A chance meeting brought Goeree on the scene with a question: Why don’t you create a market remotely?

Prioritised goals

Designing a one-off market would not only solve the problem of price discovery for the value of the shares, but through a series of rounds held a week or so apart (to allow for the running of many scenarios) it would also reveal the most effective way to use the government funds.

Goeree explains: “Simply emulating a standard share market like the Australian Securities Exchange (ASX) would not work for many reasons. Those who wanted to leave would have to sell their different shares separately and it might well have been that one type of share sold easily, but another not at all.

“The outcome could be that half of someone’s business is sold for little revenue, after which the fisher would have neither a viable business nor enough savings,” he says.

There’s also the risk that those who buy may start purchasing in a certain share class but never make it to the legally required minimum level to go fishing, Goeree points out. And, on a standard share market, he adds, “there is no subsidy for either the buy or the sell side”.

A list of prioritised goals created further complexity in the NSW Fisheries case.

“The market could not be cleared like the ASX where trades occur whenever a buyer meets an asking price. Instead, market clearing and subsidy allocation had to be done in such a way that several prioritised objectives were met,” says Goeree.

The first priority was meeting the needs of active fishers with large share deficits. Second were other active fishers. Then came exiting fishers and more.

While Goeree, his colleagues Martin Bichler and Vladimir Fux at the Technical University in Munich, and the NSW Fisheries team considered the intricacies, a May 2016 announcement that fishing access rights would become binding saw many of the state’s fishers, who had grown accustomed to the status quo, express loud concerns.

Active fishers worried they wouldn’t be able to acquire enough shares. Fierce lobbying and protests ensued.

“Many did not understand how in the new system, once a cap is in place the value of the rights changes in their favour,” observes Ferrell.

A parliamentary inquiry into commercial fishing was eventually held in late 2016 resulting in 18 recommendations that sanctioned the review process, the market and the establishment of an industry peak body.

‘A fantastic result’

When the market opened on May 1, 2017, there were more sellers than buyers, far more than anticipated given the industry discussion in the lead up, says Ferrell, but it delivered what he calls “a fantastic result”.

In the case of minimum shareholding fishers, who needed more shares so they could stay viable, more than 95% of the deficit was eliminated by the market. Among those looking for bigger quotas, the deficit was reduced by 75% out of a possible 88% – “There was no supply in many share classes,” Ferrell explains. Just a handful of sellers are still being case managed through final negotiations.

'In the last round, we ran 22 different scenarios to look at budget versus expenditure allocations to find the sweet spot’ '

– JACOB GOEREE

Ultimately, by putting shares in the hands of motivated active fishers the upshot will translate to a healthier fishing industry, Ferrell suggests.

Both Goeree and Ferrell agree the quiet beneficiary of the marketplace is the taxpayer as the team assiduously sought optimal ways to spread the government funding.

“In the last round, we ran 22 different scenarios to look at budget versus expenditure allocations to find the sweet spot,” Goeree says.

And is the project a world first?

“With hundreds of participants, over a hundred different share classes, and a number of prioritised goals, the market was extremely complex ‘under the hood’. Yet, the beauty of it was in making the process simple for the fishers: both for buying fishers, by guaranteeing enough shares, and for selling fishers, through all-or-nothing bids,” Goeree says.

“I am not aware of any market this complex that has been run on such a scale, and the amount of deficit reduction, accomplished at low cost to the taxpayer, is better than anyone could have hoped for. For a market designer, it doesn’t get better than that.”

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