Capital Dynamics in the North Sea Herring Fishery

Abstract

Dynamic adjustment is an integral part of natural resource economics. Commonly, capital is assumed to respond instantaneously to changes in profits, while in reality adjustment may take place only with a time lag. In this paper, an empirical analysis of capital (boat) dynamics in the North Sea herring fishery is undertaken. A discrete time model is formulated to model decisions of boats to enter or exit the fishery. A lagged model is specified to reflect adjustment time to changes in profits. The empirical results indicate that fleet adjustment in this fishery primarily depends on current period profits and that the opportunity cost may depend on returns in the alternative fishery. Inclusion of lagged variables to account for the construction time for new boats, showed only a small improvement in the statistical fit. Moreover, the results did not support a hypothesis that entry in response to positive profits is more elastic than exit due to negative profits.