Harvest Efficiency and Discards under Harvest Uncertainty and Trading Frictions

We study harvesting efficiency and the problem of discards under harvest uncertainty in a fishery that is managed with quotas. With only idiosyncratic harvest uncertainty, we show that frictionless post harvest quota trade can achieve full efficiency and eliminate quota-overage discards completely. In the absence of such trade, we deduce an ad-valorem tax/subsidy that eliminates discards while delivering a desired aggregate harvest target. Alternatively, we show that a hybrid policy, i.e., a combined quota and landings fee, can implement a manager's aggregate target harvest level efficiently and without discards. When harvest shocks, in addition, have a fishery-wide common component, post-harvest quota trading per se cannot eliminate discards; policy intervention in the form of either landing taxes or a hybrid scheme is needed. Given the prevalence of trading restrictions in many quota-managed fisheries worldwide, our paper offers important policy advice.