A basic feature of traditional fishingfirms (with up to 13 crew members) is that all resource owners (shipowner,skipper, engineer, cook, seamen) are compensated with a share of the netrevenue after paying certain common costs (e.g., nets, food). The shipownerpays for the fuel and the ship’s repairs. The most elaborate fishing firms arethe medium-sized ships which fish in deep-sea grounds for periods of one tofour months, with 11 to 13 crewmen. Participants in this traditional fishingfirm include: the ship-owner, who may be an individual, a partnership or acompany; the fishing skipper, who is responsible for the ship and handlesnavigation while fishing, this being the reason why the team’s productivitycrucially depends on his performance; the coast skipper, who substitutes the skipperas the second in command; the engineer, who looks after the engines, thefreezer and the electric systems, sometimes helped by a greaser; the cook,whose task is, obviously, to prepare the food; and, finally, the commoncrewmen.
In these medium-sized boats, thefishermen’s wage varies greatly with the value of the catch and some of theexpenditures incurred for each specific voyage, which is called the “share orlay system”. The distribution of rewards begins with gross revenue, themonetary value of the catches obtained in a fishing expedition, which isestablished in open auction in the formal wholesale fish markets. The markettakes care of the auction and the payments and also certifies the proceeds fromthe sale. Sharing follows a refined process. Gross revenue is first reduced bythe commission paid to the market (between 3.5% and 4.5%). Next to be paid arecommon expenditures, which are collectively supported, such as food provisions,fishing tackle (nets, rods, lines, etc.), bait, salt, ice and commutingexpenses. The shipowner finances these common expenditures, recovering themonly after the catch is sold out. If the value of the catch is lower than theexpenditures, the difference is accumulated and deducted from future catches.Once the common expenditures have been deducted, the resulting net revenue isdivided in two parts, one for the ship-owner and the other for the crew. Intraditional wooden boats, this division is made more or less on equal terms.The allotment received by the crew is allocated among crewmen according totheir relative human capital. The amount is divided by the number of fishermenplus 1.5 (so that q = 0.49 [CV-CE] / [n+1.5], where n is the total number ofpeople in the boat). The value of each resulting portion, q, is called a“share”. Every crewman earns one share, except the fishing skipper, who getstwo, and the coast skipper, who takes one and a half. From his participation innet revenue, the shipowner pays two additional shares, one to the fishingskipper and another one to the engineer, as well as one half or one quarter ofa share to the cook, and another quarter to the greaser, if there is one.Moreover, he has to pay for all the fuel consumption and the ship’s insuranceand repairs. The residual income, if any, compensates him for the cost ofcapital.
You can find it useful to study theclassic Alchian and Demsetz (1972) paper before answering the questions.
1. How do you explain the prevalence ofthe pattern of sharing in net revenue?
2. And what about the sharing of somecosts but not all?
3. The bigger ships have distinctivefeatures: they are more costly and have larger crews (30-50), longer sailingtimes (three to five months) and they fish in remote seas. Many of them notonly catch the fish but also clean and freeze it. They are usually owned bylarge ship-owning firms, some of which have hundreds of ships. Building on yourexplanation for the previous questions, predict how workers in these largeships are compensated.
1. Two possibilities: Either (a) risksharing among participants, assuming they have similar preferences towards riskor, more correctly (according to the available evidence), (b) efficientincentives. These efficient incentives are related to team work and the developmentof a disciplinary mechanism based on implicit or explicit dismissals of theleast efficient resources—be they the fishermen, the skipper or the boat—byother participants. Under team production, those resources which controlindividual members’ productivity are usually the only ones compensated with aresidual which varies with team performance. This pattern is usually efficient,as shown by the prevalence of the conventional firm. Compensating all teammembers with a share in the team’s product is viable, however, when the marketfor team members is competitive. As fishing firms show, this competition isfacilitated when: the costs of switching teams and of measuring teamproductivity are low, there are few advantages in specializing the productionof control and the rationalization process is costly. (The possibility thatmarket competition may act as a monitor of team performance is brieflymentioned by Alchian and Demsetz [1972, p. 781]). The fishing firm provides aninteresting case to study because it is a hybrid between the conventional firm,the full-fledged corporation and the industrial cooperative: usually itseparates ownership and control and not only these two functions but also laborare compensated with a share of net revenue. The analysis of these firms showsthat the collective action problem caused by costly monitoring of individualproductivity in a team production set-up can be effectively controlled by meansof competition amongst resource owners trying to become members of the mostproductive and best remunerated teams. In this context, the role of sharingcompensation is to further motivate switching teams and mutual monitoring andto reduce the costs of rationalizing. The system is so effective thatparticipants are willing to assume certain costs in terms of otherwiseinefficient risk assumption. Several conditions are present in the fishingindustry which help this scheme to work effectively: (1) the effectiveness ofmutual monitoring among team members in producing information on individualperformance; (2) the costs of switching teams and firing team members, whichare low enough not to impede competition; and (3) the easy measurement of theteams’ output. Furthermore, if participants are assumed to have costly decisionprocesses, sharing in the team net product helps them to substantially reducesuch costs, especially in terms of discounting and self-control.
2. Risk sharing cannot account for thedifferential allocation of costs. The hypothesis of efficient incentives alsoaccounts for the detailed pattern of cost sharing, some specific payments whichare made by the shipowner to some crew members and the contracting patterns forship ownership. (a) Several expenses are divided almost equally between theshipowner and the crew. These include bait, fishing tackle and food provisions.In contrast, the shipowner pays all the expenditure on fuel, financial chargesand maintenance costs. It is easily arguable that the crew is more able toaffect the level of the first group of expenses. Consequently, making them paya part of them induces cost containment. Renegotiations and adjustments aroundthis pattern confirm such an explanation. Crews in several harbors began to payfor fuel consumption after abandoning their traditional fishing grounds in EUwaters for Moroccan seas. It seems that longer distances induce highervariability in fuel consumption, which needs to be controlled. (b) The simpleststory to explain why the shipowner pays one share each to the engineer and theskipper and between a half and a quarter to the cook and the greaser is thatthis practice induces them to maintain the ship in good condition and not towaste food, respectively. The threat of withholding or renegotiating theseshares might be an effective way of enforcing these incentives. (c) A patternof unified ownership and control seems to provide the best incentives for theship’s maintenance and conservation. For small to medium-sized boats,intermediate levels of specialized ownership are common by means ofpartnerships. In these cases, call options are frequently provided to theskipper in order for him to hold the residual claim on the ship and,consequently, motivate him to maximize such a value.
3. The prediction should depend on theprevious answer to question (1): If risk sharing, with fixed salaries. Ifincentives, with sharing arrangements. In real life, all of these ships aremanaged by professional captains who have no ownership claims on them. They donot exactly use a sharing system, because it is not possible for them to knowthe precise value of the corresponding catch. Some workers do not stay for thewhole sailing season and most fish is sold to internal divisions, directly tointermediaries or in foreign fishing markets, at prices that are not veryreliable for the crew and in many cases months later than the bonuses are paid.Crewmen are therefore remunerated with a percentage of the estimated value ofthe catch, but they are guaranteed a certain fixed amount whatever the catchturns out to be. For most firms, the share goes from 0.80 to 1.00% of catchvalue for a common seaman, depending on his skill, up to 7.00% for the ship’scaptain. Earning variability is substantial, going from the guaranteed levelsup to twice as much. Earnings are estimated on a daily basis by keeping apermanent inventory of catch value, calculated through market prices which arefrequently updated. This allows crew members to sail shorter periods than theships. Some of these do not harbor for unloading the catch, which is landed bycargo vessels.
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