Analysis Land subsidence, production efficiency, and the decision of aquacultural firms in Taiwan to discontinue production Hung-Hao Chang a, ⁎, Richard N. Boisvert b,1 , Ling-Yi Hung a a Department of Agricultural Economics, National Taiwan University, No 1, Roosevelt Rd, Sec 4, 10617, Taipei, Taiwan b Department of Applied Economics and Management, Cornell University, 455 Warren Hall, Cornell University, Ithaca, NY, 14853-7801, United States abstract article info Article history: Received 24 July 2009 Received in revised form 9 May 2010 Accepted 13 July 2010 Available online 9 August 2010 Keywords: Aquaculture Land subsidence Production efficiency Data envelopment analysis Discrete choice models Taiwan For some time the over-pumping of groundwater by aquacultural producers has contributed to severe problems with land subsidence in many areas of Taiwan. This has led to policy initiatives that impose extra costs on groundwater users. By investigating the effects of the conditions of aquifers, production efficiency and other factors on decisions of Taiwanese aquacultural producers to exit the industry, this paper lays an important foundation for an understanding of the effects of these policy initiatives. Using data from a nationwide survey, this exit decision is examined using an innovative empirical strategy that combines Data Envelopment Analysis with a discrete choice econometric model. Results indicate that less efficient firms and those located in areas where land subsidence is severe are more likely to exit. These relationships may in part reflect the effectiveness of the recent policy changes to reduce land subsidence attributable to aquaculture production. © 2010 Elsevier B.V. All rights reserved. 1. Introduction Over the past couple of decades, the aquacultural sector in Taiwan has undergone dramatic changes. Production costs in Taiwan are relatively high compared with those in other countries. Since Taiwan joined the World Trade Organization in 2002, domestic products must now compete with these lower-cost imported products. Due at least in part to this increased competition, the number of aquacultural firms in Taiwan has declined in recent years. Between 2000 and 2006, for example, the number of aquacultural firms fell by about 12%, from nearly 42 thousand to just under 37 thousand (Council of Agriculture, 2007). For these reasons, there is increased interest in Taiwan toward re-orientating policy to facilitate production adjustments by aqua- cultural fisheries. Because efficiency of resource use is one of the drivers of aquacultural development, policies have been proposed that would encourage some of the less efficient firms to leave the business (Fisheries Agency, 2007). In spite of its considerable economic benefits to the Taiwanese agricultural sector, aquacultural production has also had some negative environmental effects. Since water quality as well as quan- tity is essential for aquacultural production, the demand for fresh water by aquacultural producers has contributed to the growing demand for groundwater in recent years. In some areas in Taiwan, this increased use of groundwater for aquacultural production has also led to severe problems with land subsidence (e.g., Chen et al., 2006; Liao and Chen, 2008). According to the official reports, the annual rate of land subsidence in the major aquacultural production regions increased from 7 to 11.7 cm between 1985 and 2005 (Water Bureau in Taiwan 2008). To alleviate this problem, legislation to control land subsidence was launched in 1995 by the Taiwanese Legislative Yuan (Pense et al., 2008; Yang and Yu, 2006). 2 Under this legislation, there are serious monetary penalties for pumping ground- water in areas where land subsidence is severe. These penalties are expected to affect the succession plans of firms that are located in the land subsidence areas. To develop effective policies to achieve a structural adjustment in the aquacultural sector, it is crucial to have a better understanding of the producers' behavior and the factors that are related to their decisions to exit the industry. For this reason, the research reported in this paper focuses on the extent to which production efficiency and land subsidence, as well as other factors, may be associated with the decisions of firms to exit the sector. The analysis is based on data from a nationally representative random survey of the aquacultural firms in Ecological Economics 69 (2010) 2448–2456 ⁎ Corresponding author. Tel.: + 886 2 3366 2656; fax: + 886 2 2362 8496. E-mail addresses: hunghaochang@ntu.edu.tw (H.-H. Chang), rnb2@cornell.edu (R.N. Boisvert). 1 Tel.: +1 607 255 4545. 2 Taiwan's government (Ministry of Economic Affairs, MOEA and the Council of Agriculture, COA) initiated a five-year Land Subsidence Prevention and Reclamation Plan (LSPRP) in 1995 to remediate the land subsidence problem. The Plan's main objectives are: (1) to alleviate land subsidence problems from groundwater overdraft and (2) to develop improved land-use and water resources plans in subsidence affected areas to minimize further economic and social losses. The Fisheries Agency, COA, is mainly responsible for aquaculture production control and water conservation. 0921-8009/$ – see front matter © 2010 Elsevier B.V. All rights reserved. doi:10.1016/j.ecolecon.2010.07.020 Contents lists available at ScienceDirect Ecological Economics journal homepage: www.elsevier.com/locate/ecolecon