Pacific salmon are a resource shared by the United States and Canada. In the ocean, salmon migrate across international boundaries, passing through coastal areas of Oregon, Washington, British Columbia, and Alaska. As a result, U.S. fishers inevitably intercept salmon originally from Canada, and vice versa.
The two countries have a long history of squabbling over their respective shares of the catch. In July 1997, after the Canadian government accused the U.S. of aggressive fishery, angry Canadian fishermen blockaded the Alaskan ferry Malaspina with 200 fishing vessels, preventing it from leaving the Prince Rupert port in British Columbia. In an effort to end the escalating fish war, the two governments entered into a long-term fishing agreement under the Pacific Salmon Treaty in 1999.
In research published in the February 2020 issue of The Economic Journal, Economists Shenzhe Jiang and Yuzhe Zhang have discovered two ways to improve the efficiency of the Pacific Salmon Treaty. Redesigning the treaty could increase total welfare of the two countries by $52.1 million, or 1.55% of the welfare achieved in the current one.
First, although the U.S. has taken a large share (approximately 94.2%) of the salmon resource in the current treaty, the authors find that it is optimal for the U.S. to take even more (99.3%). The U.S. deserves this large share because its production function is more efficient than Canada's. In particular, the ratio between value-added and fishing revenue is only 22.5% in Canada, but at least 40.9% in the U.S. Allocating more salmon to the U.S. can therefore increase the total value added by $27.40 million, which accounts for 0.82 percentage points in the aforementioned welfare gain.
Second, since 1999 the U.S. has made two payments to Canada for the latter to stay in the treaty, with an average payment of $56.31 million. These payments incurred large transaction cost, because several government agencies, including both countries' diplomatic, commercial, and environmental departments, were involved in the negotiation, and the payment needed to be discussed and approved by both countries' legislatures. The authors find that it is optimal for the U.S. to raise the payment amount but reduce frequency. Total transaction cost would be reduced by $24.70 million, which accounts for 0.74 percentage points in the welfare gain.
Finally, this paper contributes to the methodology in economic research by developing a dynamic game-theory model to study resource sharing under hidden action and monetary transfer. The model can be easily applied to study other problems with revenue or profit sharing, which are pervasive in economics. In franchising, for example, the franchisor and the franchisee are respectively responsible for developing the value of the trade name and managing the outlet on a day-to-day basis. Both efforts affect the performance of the outlet, but are difficult to monitor. Other examples include sharecropping, licensing, author-publisher contracts, research teamwork, and oligopolistic competition.
On the Pacific Salmon Treaty by Shenzhe Jiang and Yuzhe Zhang is published in the February 2020 issue of The Economic Journal.
