Michael Giberson
I laughed at this line in an article in the Washington Post:
But one survives by catching the other and selling it to be eaten. So, as economists say, their interests are not always aligned.
The article discusses the Maryland state government’s attempt to reduce the number of “limited crab catcher” licenses in order to better manage the fishery (crabbery?). They sent out letters to all 3,676 license holders asking them to, in effect, name their price, with the state planning to buy back the cheapest 2,000 of the offers. Is it obvious that economists were behind this idea?
Unfortunately, fewer than 500 offers were submitted in return and many of them were much higher than what the state was willing to pay. In response:
Maryland officials have … gone to a more old-fashioned approach: the carrot and stick. They’re offering the 3,676 small-time watermen a fixed price, $2,260, for their licenses.
Those who don’t accept the offer and haven’t caught crabs in five years might face an uncomfortable choice. If they want to keep their licenses active, they might have to agree not to pass them on to future generations of their family.
The newspaper article is a little sketchy on various details that matter. If the original proposal was to buy the licenses offered at the offered price, this method could have been part of their problem. Most respondents probably had only vague ideas about how much the state would be willing to pay, and so they were unsure how much to offer. Would you want to be the sucker who sold an unused license back to the state for $1000 if a neighbor was paid $5000? Perhaps better to not participate, or name an arbitrarily high price.
An iterative approach that provided some feedback to participants might have worked much better. For example, in 2001 Georgia used an “iterative discriminatory auction” process in which they asked for offers from farmers (to forgo use of irrigation permits for the rest of the year), the state responds by telling farmers which offers would have been accepted that round. Farmers can then resubmit offers, and the auction repeats until no one submits a new offer (or the state calls an end). This process provides feedback enabling price discovery. While they “paid as offered” (I think the law required this approach), because of the feedback in the auction process, no one was unduly surprised by the offer prices that were accepted.
Despite Maryland’s experience, Virginia officials are trying a reverse auction of their own. Their offer went to all 1,800 of the state’s licensed crabbers, big-time and small: Name your price. Bids are due Nov. 1.
Any bets on the likely success of Virginia’s program?
(HT Market Design: What if they ran an auction and nobody came?)