Bargaining and side payments

Table 3 Species and unit stocks under a ‘decentralised’ approach — how whales could be classified in order to pursue a decentralised approach to bargaining a North Pacific Southern hemisphere North Atlantic Protected Right Protected Bowhead Protected Not present Protected Not present Not present Gray Humpback Protected Protected Blue Fin Protectedsustained Protected Protected Protectedsustained Sei Initial Bryde’s Initialsustained Initial Sustained Minke Sustained Sperm protectedinitial Protected a Adapted from Kuronuma and Tisdell 1993.

5. Bargaining and side payments

As far as the specific of bargaining is con- cerned, it is worth noting two points: 1. The costliness of bargaining between interested parties may be not very high if proper institu- tions and rules are set up. Ambiguity of objec- tives and lack of commonly shared rules increase costliness of bargaining. This could allow a ‘Coasian’ bargaining between parties Harsany, 1989; Merrifield, 1993, aimed at achieving the most valuable use of the re- source. The success of such a deal depends mostly on the institutional capacity to reduce transaction costs. IWC should play this role. The valuation and consequential bargaining process should deal, for whales, with each species and unit stocks separately see Table 3. Similarly, sustainability of harvest refers to unit stocks, not to the species as a whole. 2. The current ban under enforcement has led to an ex post bargaining process without redistri- butions, and some countries Norway, Japan, Iceland, Russia and South Korea are not accepting it because the costs for them are higher than the benefit. What I want to ex- plore and suggest is an ex ante bargaining process with redistributions. If the first frame- work has been demonstrated to be inefficient, an ex ante bargaining possesses the potential to perform better. There are two causes by which a ban, even if it could be proved optimal in the short run, is not optimal and self-enforceable in the long run. First, enforcement is effective if and only if cir- cumvention costs are higher than incentives to catch; secondly, a ban may change the manage- ment system from a property right based to open access Schulz, 1997. Circumvention costs have been increased by means of threatened trade sanc- tions. Nonetheless, inconsistency of trade mea- sures weakens their credibility as deterrents. With non-credible threats, agreements are not sustain- able as Nash bargaining solutions Raiffa, 1982; Binmore, 1992; Binmore et al., 1986. It follows that trade sanctions do not make the deal self- enforcing. The suggestion is that an ex ante bargaining process with redistributions is a better theoretical framework for policy making. The costliness of the ex ante approach, definition of individual shares, total globalregional quotas and monitor- ing, may be reduced by using recurrent short term ‘contracts’ between parties Williamson, 1985. By means of short-term agreements i.e. 6 – 8 years reciprocity could be increased and opportunistic behaviour discouraged. Flexibility is also assured to adapt contracts to emerging situations. An ex ante agreement with redistributions means that the possibility of transferring benefits between parties should explicitly be taken into account. The use of side payments within IEA has been demonstrated to potentially improve the so- cial welfare from bargaining Munro, 1979; Hamalainen et al., 1984; Carraro and Siniscalco, 1997. I claim that a new whale convention might explore and include such a possibility. Munro 1979, 1986, 1996 demonstrates that, by allowing side payments in a shared and joint management fishery, difficulties are reduced with respect to the benchmark without compensation. As he considers two agents with different discount rates, optimal payments policy calls for the low- discount-rate country to buy out the other coun- try at the beginning of the game. Both will be better off and the choice is determined by prefer- ences. The ‘whale issue’ is more complicated, as whales are mammals with attached mixed conflict- ing values on use. Discount rates are not the only difference leading to conflicts in management. I argue that, in the presence of substantially differ- ent discount rates, the low country preferences should be given more weight in the present and eventually dominate the more distant future. If discount rates are assumed to be equal, compen- sations should be paid according to relative gains and losses, framing the bargaining on Kaldor – Hicks criterion of welfare. The mixed good-shared resource paradigm can provide a useful general framework for bargaining analysis and institution making. Summing up, joint owners value whale stocks differently. The optimal outcome is the one ap- pealing to common sense, that is assigning the rights of exploitation and use, to ‘consume’ more of the stock, to the agents that value the resource relatively more, eventually compensating other stakeholders by means of transfers of utility. Having introduced the rationale for setting aside payments into the bargaining arena, it is worth acknowledging some problematic points. “ Who has property rights on whales? That is, should a victim pay principle VPP or a pol- luter pay principle PPP be adopted? Although economic efficiency is not affected by this choice, welfare distribution is. Do the whalers have rights to exploit the resource? Does the global community have the rights to ‘con- serve’? The Law of the Sea gives clear but still ambiguous guidelines, assessing that countries should cooperate in order to achieve sustain- able use of migrating resources. Migrating whales should be managed co-operatively, and stricter guidelines should apply to marine mammals and to the endangered marine spe- cies Birnie, 1989; Kaitala and Munro, 1993. “ The property right structure is relevant both for structuring acceptable surveys aimed at eliciting non-use values, and for setting up bargaining rules at the institutional level. Ma¨ler 1992 suggests that, for policy purposes, the victim pays principle should receive more attention as it may prove to be more effective in achieving desired outcomes by means of side compensatory payments Rettig, 1994. “ Free riding behaviour among non-users may lead to sub-optimal side payments and so to private sub-optimal provision of the whale stock as a public good. Expressed values may turn out to be lower than actual benefits. “ Strategic behaviour by agents receiving com- pensations is to be carefully studied. Incentives to cheat may exist before and after the receipt of bargained compensation. “ Side payments could be questioned on ethical grounds. It is highly probable that ‘pro whale’ organisations representing non-use values would never accept to ‘pay’ money for saving whales, tending to express lexicographic prefer- ences over marine mammals. While there is general acceptance of the polluter pay princi- ple, the idea of anti-pollution groups paying polluters not to pollute Ma¨ler, 1992 would probably be unacceptable to most stakeholders. Unacceptability of transfers to ‘polluters’ means that i creating a market by allocating and exchanging property rights is an institutional pro- cess not compatible with a non-compensatory structures of preferences Lockwood, 1999a,b; ii willingness to accept is believed to be the only compatible structure of possible compensation for public marine resources Edwards and Carlson, 1989. Nonetheless, WTA, as an ex post measure of compensation, might be more problematic in terms of credibility and self-enforcement of agree- ments. In addition, people may be unwilling on ethical and economic loss aversion grounds to accept monetary compensations for a loss. 11 The issue further needs empirical investigation Loomis and Larson, 1994; Loomis and White, 1996. Nonetheless, the willingness to contribute financially to the non-consumptive management of the resource might be important for the long- term sustainability of the agreement. I am aware that the point is provocative. The possibility that compensatory measures might be an incentive and support self-enforcing agree- ments is nevertheless highlighted. 12 I am also aware that implementation of side payments compensations to losers together with a Kaldor – Hicks KH 13 criterion can be justified only on economic-ethical grounds Freeman, 1986, the KH decision rule being the more ‘ethi- cal’ solution within neo-classic measures of social welfare change. Nonetheless, extending the do- main of economics to more holistic and ethical- rooted approaches, an atomistic framework could be sharply inconsistent with broader definitions of socio-economic welfare Norgaard, 1989.

6. Conclusions