ITQs, Firm dynamics and wealth distribution: Does full tradability increase inequality?

Abstract

Concerns over the re-distributive effects of individual transferable quotas (ITQ’s) have led to restrictions on their tradability. We consider a general equilibrium model with firm dynam- ics to evaluate the redistributive impact of changing the tradability of ITQs. A change in tradability would happen, for example, if permits are allowed to be traded as a separate asset from ownership of an active firm. If the property right is associated with ownership of an active firm, the permit can be leased in each period but it is not possible to exit the industry and keep the right. However, allowing the permits to be traded as a separate asset has two effects. First, it leads to a greater concentration of production in the industry. Second, it directly converts a non-tradable asset into a tradable one, and this is equivalent to giving a lump sum transfer to all firms. The first effect implies a concentration in revenues, while the second implies a redistribution of wealth. We calibrate our model to match the observed increase in revenue inequality in the Northeast Multispecies (Groundfish) U.S. Fishery. We show that although observed revenue inequality –measured by the Gini coefficient– increases by 12%, wealth inequality is reduced by 40%.