The behavioral effects of index insurance in fisheries

2026-01-14

AI Summary

This study addresses the dual role of index insurance in fisheries: while it can mitigate income volatility caused by environmental risks, it may also alter fishing incentives and thereby affect resource sustainability. For the first time, index insurance is integrated into a behavioral model of fisher decision-making, employing both conventional and flexible production functions. Using empirical parameters from three Norwegian fisheries, the authors conduct numerical simulations to examine how different insurance designs influence risk-coping strategies and catch levels. The results show that insurance targeting stock abundance risk may increase catches by 6%–20%, whereas coverage for operational risk could either raise catches by up to 10% or reduce them by 2%. These findings demonstrate that the direction of fishing incentives depends critically on both insurance design and the underlying source of risk, moving beyond single-risk assumptions and highlighting the pivotal role of insurance mechanisms in shaping ecological sustainability.

Technology Category

• Game Theory and Economic Paradigms: Mechanism Design
• Multiagent Systems: Mechanism Design
• Reasoning under Uncertainty: Decision/Utility Theory

Application Category

• Economics, Online Markets and Human Computation: Incentives in network design for Web infrastructures and ecosystems
• User Modeling, Personalization and Recommendation: Metrics for user behavior and evaluating success
• Security and Privacy: Large-scale security measurements

Abstract

Fisheries are vulnerable to environmental shocks that impact stock health and fisher income. Index insurance is a promising financial tool to protect fishers from environmental risk. However, insurance may change fisher's behavior. It is imperative to understand the direction fishers change their behavior before implementing new policies as fisheries are vulnerable to overfishing. We provide the first theoretical application of index insurance on fisher's behavior change to predict if index insurance will incentivize higher or lower harvests in unregulated settings. We find that using traditional fishery models with production variability only originating through stock abundance leads fishers to increase harvest with index insurance. However, fishers are adaptable and experience multiple sources of risk. Using a more flexible specification of production shows that index insurance could raise or lower harvest depending on the risk mitigation strategies available for fishers and the design of the insurance contract. We demonstrate the magnitude of potential change by simulating from parameters estimated for three Norwegian fisheries. Fisheries with index insurance contracts protecting extraction risks may increase harvest by 10% or decrease by 2% depending on the risk effects of inputs. Insurance contracts protecting stock risk will lead to 6-20% increases in harvest. Before widespread adoption, careful consideration must be given to how index insurance will incentivize or disincentivize overfishing.

Problem

• index insurance
• fisheries
• behavioral effects
• overfishing
• environmental risk

Innovation

• index insurance
• fisher behavior
• risk mitigation
• production variability
• overfishing incentives