A new theory of 'crabonomics'

Our view: Univ. of Md. economists have devised an intriguing program with a touch of economic theory and eBay to buy back crab licenses

April 05, 2011

Economists believe that they can set a rational price for almost everything, so a few are trying their hand at crabbing.

A team of economists from the University of Maryland, working with the Maryland Department of Natural Resources, has devised an intriguing program to use $3.5 million in federal funds to buy back and retire seldom-used commercial crabbing licenses that have been issued to watermen working the Chesapeake Bay. The state has tried this before, with at best modest success, but this time they may have a better idea.

The objective of the buyback is to reduce pressure on the crab population and to enable DNR officials to get an accurate count of the number of active commercial crabbers working the bay. Although the targets for the buyback program are people who don't use their licenses very often, an unknown number of them will make use of them in any given year, and DNR wants to remove that unpredictability from their calculations on how to manage the crab harvest. Better numbers would result in better policy, or so the theory goes.

When the state tried a buyback two years ago, it asked watermen to name their own price. It didn't work so well; one waterman offered to sell his for $425 million. The state tried again by offering $2,260 for the holders of "limited crab catcher" licenses and did modestly better. This time, the state is going after a higher class of licensees, and it's trying a more sophisticated theory of "crabonomics."

There are an estimated 650-700 holders of large-scale licenses who have not crabbed in the bay in the past three years. If they were to become active — and given recent rebounds in the crab population, larger numbers of them might be expected to try — the impact on the crab population could be devastating. The 2009 license buyback program was aimed at those whose licenses allowed them to work a maximum of 50 crab pots. This one is aimed at license holders who could harvest 300 to 900 crab pots and, in some cases, fin fish as well.

The state is offering interested watermen a choice of selling their licenses at either of two price points. A waterman with a tidal fisheries license and authorization for 600 crab pots, for example, could decide he wants to sell it for the base price of $8,000. Or he could take a shot at selling the same license for $10,000.

The lower number is a safer bet because DNR will redeem those offers first. It will keep buying base price licenses until all the funds allocated for that portion of the buyback have been exhausted or until all licenses offered at the lower price have been purchased. Then, and only then, does it start buying licenses from people who offered to sell for the higher price.

The state has allocated $415,000 of the $3.5 million to the 600-pot tidal fisheries licenses. Suppose 40 watermen offered their license at $8,000 and 27 offered theirs at $10,000. The 40 licenses at $8,000 would be bought first, leaving $95,000 in the pot, or enough for nine licenses at $10,000. The winners of those nine sales would be selected at random in a public drawing from the 27 licenses offered, giving a waterman who tried for the bigger payoff only a 33 percent chance of getting anything at all.

Similar scenarios illustrating possible odds and the pools of eligible license holders and money have been placed on the DNR website for each of the six categories of licenses that DNR is buying back. The amount offered ranges from a base of $4,000 for the crab harvester license, which allows the holder to fish with up to 300 crab pots, to $12,000 for a tidal fishing license with authorization for 900 crab pots in the bay.

The buyback is voluntary, but once a license holder chooses a price — paperwork is due by April 15 — it cannot be changed. The first stage of results will be announced May 15.

The concept behind the program this time, according to University of Maryland economist Jorge Holzer, is to make the buyback attractive enough to draw participation from watermen, but not to overpay. Highly successful crabbers won't be interested because their licenses have more value than what the state is offering, Mr. Holzer said. But the offer could be attractive to someone who is sitting on a license, seldom using it.

The prices that the economists have set are fair, a pretty close representation of what licenses sold on the private market bring, said Larry Simns, head of the Maryland Watermen's Association. Mr. Simns supports the buyback but said the state is more worried than he is about the possibility of a sudden surge in the number of active crabbers. Crabbing, he said, is a hard way to make a living.

Economists acknowledge that while money matters to watermen, there are some factors, such as the desire to work on the water, that their models can't capture.

But for purposes of taking seldom-used licenses off the market, this plan seems like a good one, even if getting top dollar is something of a "crab shoot."

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