Policy design in an imperfect world: Essays on the management and use of open access renewable natural resources

The economic literature contains a well-established set of theoretical models that yields powerful insights regarding the efficient management of open access natural resources. However, these standard approaches often overlook important “real world” complications. This dissertation explores the implications of certain real world rigidities in physical and social capital for the management of fisheries and water resources. Chapter 2 considers a rigidity rarely examined in the fishery literature: sunk costs associated with fishing capital. To explore possible impacts of sunk costs on the dynamics of an open access search fishery, a standard model is modified to incorporate a sunk start-up investment. This extension may explain periods during which fishers persist in the industry, either further depleting the over-harvested fish stock or by slowing the rate at which the fishery recovers, even though rents are insufficient to attract new comers. Policy implications of these results are then examined. In Chapters 3 and 4 the discussion turns to water resources. Based on my field research in semi-arid Brazil, Chapter 3 analyzes a unique system of tradable water rights that has existed for over a century as a solution to inefficiencies concerning the use of a local open access water resource. The analysis considers factors that appear to have not only played a key role in facilitating the original negotiated agreement, but also to its abidance by subsequent generations. Many of these factors point to a fundamental role of social capital. Chapter 4 considers the difficulty of designing, establishing, maintaining and enforcing rights that permit market allocation of water, and the well-known market failure associated with public good instream uses such as recreation, ecosystem maintenance and aesthetics. An alternative market-based instrument for achieving optimal allocation of water resources is then developed. This instrument successfully corrects inefficiencies caused by the public good nature of instream water as well as existing policy distortions such as irrigation subsidies. The instrument has the desirable qualities that: it does not rely on the existence of perfect water markets or water rights, and it overcomes the political and social constraints on manipulating the price of water directly.