FAIR CT96-1778

The Management of High seas Fisheries

Partner: Fisheries Research Institute, University of Iceland, Reykjavik, Iceland

The Herring Economic Model:

Empirical Version*

by

Ragnar Arnason

M-5.99

This document does not necessarily reflect the views of the

Commission of the European Communities and in no case
anticipates the Commissions position in this domain.

*
Acknowledgements: This document has been produced as a part of the European Commission
research project: FAIR-CT-1778. Participants in this project are: The Foundation for Research in
Economics and Business Administration and Centre for Fisheries Economics, Norwegian School of
Economics, Bergen, Norway; Helsinki University of Technology, Helsinki, Finland; Fisheries Research
Institute, University of Iceland, Reykjavik, Iceland; Universidade Nova de Lisboa, Lisbon, Portugal.
The financial support of the European Commission FAIR programme is hereby gratefully
acknowledged.
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0. Introduction

According to Arnason (1998a), the economic part of the condensed version of the herring
model may be written as:

(1) c = C(y,x,d),

(2) = py - C(y,x,d),

where x represents biomass, d distance to the fishing grounds, y harvest, c costs, p price
of harvest and profits. In this formulation, the harvest, y, represents a control variable, c
and are endogenous, x and d are given by other parts of the model and p is a parameter.
Clearly, cost function, C(y,x,d), is the key relationship in this formulation.

As explained in Agnarsson,, Arnason and Haraldsson (1999) and Arnason (1999),

empirical investigation actually supports a cost function of the type:

(3) c = C(y,t,k),

where t represents vessel operating time and k characteristics of the fishing vessel
(capital).

However, as shown by Arnason (1998b) vessel operating time can be related to

distance, harvest, biomass and some other variables, z, by a function of the type:

(4) t = T(y,d,x,z)

Thus combining (3) and (4) yields a cost function of the type (1).

This paper combines the theoretical fishing time function with the estimated cost
function and other available empirical estimates to produce an empirical version of the
herring cost function and then the economic part of the herring model as a whole.

1. The empirical cost function

Empirical investigation (Agnarsson, Arnason and Magnusson 1999) reveals the following
annual vessel cost function for the Icelandic purse seine fleet:

(5) ci = 0ki0 + 1y1i1 + 2ti2 + 3vi3 + ei,

where the index i refers to vessel i. ci represents costs, ki the vessels physical
characteristics, y1i the vessels harvest of non-pelagic species, ti the vessels operating
time, vi the vessels harvest value and ei the stochastic disturbance applicable to the
vessels costs. The s and the s are parameters.
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Now, for a given vessel, ki is a constant. In addition, for the purpose of the herring
fishery y1i may also be taken as a constant. Similarly, vi = pyi, where p is the unit price
and yi is the vessels catch of pelagic species. Finally, we may set ei at its expected value,
namely zero. This yields a more convenient formulation of (1) as.

(6) ci = a1 + 2ti2 + a2yi3,

where a1 0ki0 + 1y1i1 and a2 3p3.

Clearly, with econometric estimates of the parameters, the s and the s and
numerical measurement so the vessels characteristics, ki, other catches, y1i and herring
prices, p, this yields a numerical cost function depending only on vessel operating time, ti,
and harvest, yi. According to Agnarsson, Arnason and Magnusson (1999) this is given by:

Table 1
Means of variables and estimated parameters

Parameters/Variables Units Values

0 1.0
1 1.0
2 1.0
3 1.0
0 0.6557
1 1.3585
2 1.6556
3 0.9671
k (mean) hpdays 1,454,838
y1 (mean) metric tonnes 312
p (mean)* ISK/metric tonne. 5,000

*
assuming price of other catches roughly 10 times higher than the price of
herring

Given these estimates, the cost function evaluated at the sample means of the respective
variables is:

(7) ci = 13434 + 1.0ti1.656 + 4.742yi0.967,

where ci is measured in 1000 ISK (price level 1992), ti is measured in days and yI is
measured in metric tonnes. The unit price of harvest is assumed to be ISK 5.000 per
metric tonne.
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Note, however, that if the operating time in the herring fishery is less than the
total operating time of the vessel it seems reasonable to adjust the fixed costs accordingly
as

(8) a1 0ki0ti/T 13434ti/T.

where T is the total operating time of the vessel.

Note also, that if it is felt more reasonable to omit the cost of harvesting other
species, the fixed cost drops to 10989.

Finally, it should be noted that the cost function in (3) is concave in harvest and
convex in operating time.

2. The fishing time function

Theoretical investigation (Arnason 1998b,1999) suggests the following relationship

between fishing time and harvest.

(9) yi = ti [Ai/(Bi+d)]ti,

where Ai = (1-)ykispeed/2
Bi = (yki + it0)speed/2i,

where d is distance to the fishing grounds (in nautical miles), is the fraction of time
required for vessel maintenance, yki is vessel hold capacity in metric tonnes), speed is
vessel speed (nautical miles per day) and I is catchability (metric tonnes per day).1

Reasonable values for these variables are:

Table 2
Variables in the fishing time function

Variables Units Values

no units 0,03
yki metric tonnes 800
Speed nautical miles per day 250
i metric tonnes per day 250
t0 days 0,5

Accordingly, = 97000/(462.5+d). During the data period, the purse seine , pelagic
fishery was mostly operated around Iceland. During this period the average distance to
1
Notice that as pointed out in Arnason (1998b) this may depend on the biomass level.
 4

the fishing grounds may have been in the neighbourhood of 150 miles. This yields
=158. In other words the expected catch was 158 metric tons per operating day. This is
similar to the historical experience.

3. The empirical profit function

The above analysis has produced the following general forms of the cost and fishing time
equations:

(10) c = + t + y,

(11) y = (d)t

It is important to note that for obvious reasons

(12) tT,

where T is the total length of the period in question. It follows immediately that

(13) y (d)T.

Obviously it is now possible to construct the profit function in two different ways
as follows:

(14) (t,d) = p(d)t - - t - (d)t, tT

(15) (y,d) = py - - (d)-y - y, y (d)T

On the basis of the numerical values provided in the previous two sections, it is
easy to derive the empirical profit functions as follows:

(14') (t,d) = 5.(97000./(462.5+d)t - 13434. - t1.656 - 4.742(97000./(462.5+d)0.967t0.967

(15') (y,d) = 5.y - 13434. - ((462.5+d)/97000.)1.656y1.656 - 4.742y0.967

Functions (14') and (15') appear concave in the control variables, t and y, at least
at sufficiently high levels of the controls. The functions are plotted in Figures 1 and 2 for
two different levels of distance, 150 miles and 400 miles.

Although, the profit functions appear nicely concave, they are increasing and
approximately linear over realistic ranges of operating time and catch. This suggests that
 5

for each vessel the optimal

Figure 1 operation is of the bang-bang
The herring profit function, (t,d) type, either no fishing or
5 fishing full out.
5 10
5
3.25710
A reasonable maximum
Prof( t 150) operating time is perhaps 340
0
Prof( t 400) days. This, according to
equation (13) suggests a
maximum harvest of about
5 5
2.59510 5 10 54.000 metric tonnes per year,
0 2000 4000 6000
0 t 3 if distance is 150 miles and
5 10
only 38.000 metric tonnes if
the distance is 400 miles. The
shape of the profit function
within these ranges of harvest
Figure 2 is illustrated in Figure 3.
The herring profit function, (y,d)
5 Finally the break-even point
4 10
3.257 10
5 for operating time is 60.5 days
and for catch 9580 metric
5
Prof( y 150)
2 10 tonnes assuming in both cases
Prof( y 400) distance of 150 miles. Any
0 operating time and/or harvest
above these numbers but
5
1.502 10 2 10
5 within the realistic bounds will
0
0 2 10
5
y
4 10
5
6 10
5
5
yield profits

5 10

Figure 3
The herring profit function, (y,d)

75000
4
5 10
Prof( y 150)

Prof( y 400)

20000
4 4 4
0 2 10 4 10 6 10
0 y 60000
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4. The industry as a whole: Aggregation

Equations (14') and (15') apply to individual fishing vessels. For the industry as a whole,
the profits, i.e. aggregate profits, are simply individual profits multiplied by the number
of vessels. Focusing on equation (15'), the one that gives profits as a function of harvest,
we may write this as:

(16) (Y,d)=N(y,d),

where Y denotes aggregate catch and N represents the number of fsihing vessels in
operation.

Given the bang-bang nature of individual operations, this suggests the commercial
attractiveness of investing in new vessels if the fishery is at all profitable. In this case
equilibrium (bio-economic equilibrium) would be found where biomass has been reduced
sufficiently for the catchability coefficient, i, to imply maximum individual profits of
zero.

However, for the industry as a whole, it is unrealistic to assume that all the vessels
are equally efficient. In fact, the estimated cost function in some sense represents the
average over the vessels in the sample. The distribution of the regression residuals then
provides an estimate of the variability in vessel efficiency.

A simple way to account for this is to supplement the aggregate profit function
with an efficiency function as follows:

(17) '(Y,d) = (Y,d)(1 - (n)),

where (n) is the efficiency function and n represents the fraction of the available fleet in
operation, so n[0,1].

A simple form for the (.) is the sine-hyperbolicus type function:

(18) (n) = max(expb(n-nbar) - exp-b(n-nbar))(expb(1-nbar) - exp-b(1-nbar))-1,

where nbar is the percent of the vessels where the mean of an mean of (n), namely zero,
occurs. For a symmetric distribution nbar=0.5. max is the maximum value of the (n)
function. b is a parameter that reflects the peakedness of the efficiency distribution. Thus
b=1 corresponds to a uniform distribution. Higher values of b imply a more peaked
distribution where proportionately more of the vessels are close to the mean value. By
judicious choice of the parameters, max and b, it is now possible to generate a efficiency
function to reflect approximately a normal-type efficiency distribution in the sample. This
is illustrated by figures 4 and 5
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Now, clearly, we may regard n as values of the distribution function

corresponding to the efficiency, (n). This distribution function for (n) in Figure 4 is
illustrated in Figure 6.

Figure 4
Efficiency function
(max=0.1, b=8, nbar=0.5)
0.1
0.1

u( n ) 0

0.1 0.1
0 0.5 1
0 n 1

Figure 5
Efficiency function
(max=0.1, b=2, nbar=0.5)
0.1
0.1

u( n ) 0

0.1 0.1
0 0.5 1
0 n 1
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Figure 6
Efficiency distribution function
(max=0.1, b=8, nbar=0.5)
1
1

n 0.5

0 0
0.1 0 0.1
0.1 u( n ) 0.1

Obviously, given the shape of the efficiency function and the situation in the
fishery, there may be vessels that will not be in a position to pursue the fishery profitably
although other vessels may be able to do so. Moreover, from a technical point of view,
the aggregate profit function is now approximately concave in the fraction of the
available fleet used in the fishery with a possible maximum below full utilization. This is
illustrated in Figure 7.

Figure 7
Aggregate profit function with the efficiency function included
(max=0.1, b=20, nbar=0.5)
1
0.917

Agg ( n ) 0.5

0 0
0 0.5 1
0 n 1
 9

References

Agnarsson, S., R. Arnason and G.O. Haraldsson. 1999. Estimation of Production

Functions for the Icelandic Purse Seine Fleet. FAIR CT96-1778. The
Management of High Seas Fisheries. M-1.99
Agnarsson, S., R. Arnason and G. Magnusson. 1999. Estimation of Cost functions for the
Icelandic Purse seine Fleet. FAIR CT96-1778. The Management of High
Seas Fisheries. M-4.99
Arnason, R. 1998a. Further Modelling Ideas. FAIR CT96-1778 The Management of High
Seas Fisheries M-2.98. Institute of Fisheries Research. University of Iceland.
Arnason, R. 1998b. Fishing Time and Fisheries harvesting Function when Distance to
Fishing Grounds is Variable. FAIR CT96-1778. The Management of High
Seas Fisheries.M-6.98
Arnason, R. 1999. Modelling Herring Fishery Costs: Combining Analytical and
Empirical Results. FAIR CT96-1778. The Management of High Seas
Fisheries.M-2.99.