The behavioral effects of index insurance in fisheries

Abstract

Fisheries are vulnerable to environmental shocks that impact stock health and fisher income. Index insurance is a promising financial tool to protect fishers from environmental risk. However, insurance may change fisher's behavior. It is imperative to understand the direction fishers change their behavior before implementing new policies as fisheries are vulnerable to overfishing. We provide the first theoretical application of index insurance on fisher's behavior change to predict if index insurance will incentivize higher or lower harvests in unregulated settings. We find that using traditional fishery models with production variability only originating through stock abundance leads fishers to increase harvest with index insurance. However, fishers are adaptable and experience multiple sources of risk. Using a more flexible specification of production shows that index insurance could raise or lower harvest depending on the risk mitigation strategies available for fishers and the design of the insurance contract. We demonstrate the magnitude of potential change by simulating from parameters estimated for three Norwegian fisheries. Fisheries with index insurance contracts protecting extraction risks may increase harvest by 10% or decrease by 2% depending on the risk effects of inputs. Insurance contracts protecting stock risk will lead to 6-20% increases in harvest. Before widespread adoption, careful consideration must be given to how index insurance will incentivize or disincentivize overfishing.

Figures (8)

• Figure 1: Utility (blue lines) and optimal input use (green lines) with increasing levels of constant index insurance payouts. Inputs have high mean productivity ($\alpha=0.75$), fishers are risk aversion $a=3$, and there is high variance in both shocks ($\sigma_{w}=0.4$ and $\sigma_{t}=0.4$).
• Figure 2: Percentage change in optimal input with an index insurance contract using extraction risk, $\omega$, as the index. Risk increasing inputs (blue bars) always increase input use, while risk decreasing inputs (red bars) always decrease input use. Each panel indicates the mean productivity ($\alpha$) of the input.
• Figure 3: Percentage change in optimal input with an index insurance contract using stock risk, $\theta$, as the index. Risk increasing inputs (blue bars) and risk decreasing inputs (red bars) always increase input use. Each panel indicates the mean productivity ($\alpha$) of the input.
• Figure 4: Risk Aversion (A), trigger threshold (B), stock variance $\sigma_{\omega}$ (C), and extraction variance $\sigma_{\theta}$ (D) all influence the magnitude of change in input use. Mean production elasticity is set to 0.5. Average percent change in input (y-axis) is summarized across all other parameter combinations for each risk effect value of $\beta$. Contracts built on extraction risk are in the subpanels with $\omega$, while contracts built on stock risk are indicated by the $\theta$ subpanel.
• Figure 5: Density plots of the percent change in input use for each vessel type in Norwegian fisheries with contracts built on extraction risk $\omega$. The dashed black line represents no change in input use. Risk decreasing inputs are labeled.

Theorems & Definitions (18)

• Lemma 2.1
• Proposition 2.1
• proof
• Lemma 3.1
• Proposition 3.1
• proof
• Proposition 3.2
• proof
• Proposition 4.1
• Proposition 4.2