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The Role of Fixed Cost and Non-Discretionary Variables in Fisheries: A Theoretical and Empirical Investigation

We investigate the effects of incorporating a fixed input on equilibrium profits and biomass. We first set up a theoretical model with an input that is fixed in the short-run (vessel size) but that can be used with a variable input at suboptimal capacity. We use this model to get predictions for the impact on profits of exogenous changes in biomass, output price and vessel size. These give us interesting theoretical insights into why it is important to incorporate fixed inputs into profit analysis. We subsequently conduct an empirical investigation to gain an understanding of the effects of these non-discretionary factors on profit efficiency. In particular, we apply a truncated regression with bootstrap methodology to data on individual firm profit efficiency from the South Australian Rock Lobster Fishery. We find empirical support for our predictions that increased biomass and smaller vessel length are associated with higher profits. An additional empirical result is that individual quota management is positively associated with profit efficiency.