European Journal of Law and Economics, 4:327–335 (1997) © 1997 Kluwer Academic Publishers A Note on Overfishing, Fishing Rights and Futures Markets 1 ERWIN H. BULTE Dept. of General Economics, Hollandseweg 1, P.O.Box 8130, 6700 EWWageningen,The Netherlands, e-mail: erwin.bulte@alg.shhk.wau.nl or joost.pennings@alg.menm.wau.nl JOOST M.E. PENNINGS Dept. of Marketing and Marketing Research, Wageningen Agricultural University, email: erwin.bulte@alg.shhk.wau.nl or joost.pennings@alg.menm.wau.nl Abstract Introducing a futures market for fishing rights would increase utility for risk averse fishermen. We use the EV model to analyze possible reductions in (expected) profits for futures trading that would make fishermen indifferent between the situation with and without futures markets. It is found that a futures market for fishing rights enables policy makers to pursue substantial cuts in the size of annual quotas without hurting fishermen. In light of current overfishing and pressure from the sector to avoid dramatic cutbacks in effort, this is an important policy result. 1. Introduction After implementation of exclusive economic zones in the late 1970s, de jure open access for many fisheries came to an end. It has been well documented that this did not imply that over-harvesting of fish resources came to an end (FAO 1992). De facto, many fisheries still exhibit features of open access management. 2 Conrad (1995) writes that approximation of open access conditions can arise if management regulations are ineffective, for instance because fishermen are adaptive and eliminate or reduce the effect of regulations. Another reason for overharvesting exists. Interest groups pressure governments or supra-national organizations to set quotas at too high levels (see for instance Holden 1994). For example, in 1995 the European Commission proposed drastic reductions of fish quota to protect fish stocks, but after a process of negotiations these propositions were substantially mitigated to achieve a balance between ecological and socio-economic considerations (de Graaf 1995). In this paper we recognise that revision of European fisheries policies without particular attention for the (financial) consequences for the sector may fail. 3 We demon- strate how, under an individual transferable quota (ITQ) scheme, harvest levels can be reduced without reducing utility of (risk averse) fishermen. The European Union annually determines total allowable catches (TACs) for the Eu- ropean fishery sector. Total allowable catch is divided among the member states, who distribute the national quota among their fishermen. Member states have a certain freedom to formulate national fisheries policies, as long as total catch does not exceed the national