Evaluating tradable property rights for natural resources: The role of strategic entry and exit

This paper presents an econometric approach to the evaluation of environmental regulation using tradable property rights. Existing empirical research on this issue, which compares overall industry efficiency before and after the introduction of new regulations, conflates two distinct phenomena: efficiency changes due to exit of excess capital and changes in the efficiency of individual firms. Because the regulatory process induces firms of different types to enter and exit the industry at different rates, the true efficiency and equity effects of tradable property rights cannot be assessed without correcting for these changes in sample composition. This paper examines the impact of regulatory change in the Mid-Atlantic surf clam fishery, using an econometric model that separates its effects on industry structure and vessel efficiency. The analysis finds that, contrary to widely held belief, tradable property rights did not disproportionately benefit either large fishing firms or highly integrated firms.