Ex-Ante Diversification, Limited Entry Permit Portfolios, and Fishers’ Participation Decisions

This paper uses the limited entry (LE) permit portfolio in the previous year to construct an ex-ante measure of diversification at the individual level. We first show that LE permit portfolios in the previous year can effectively be seen as a choice set of the vessel this year. We then show that our diversification measure—the number of types of LE permits in the portfolio in the previous year—is strongly correlated with popular ex-post measures of diversification, but they tend to deviate when an external shock hits the fisheries. Focusing on the US West Coast during 1995–2016, we find that ex-ante more diversified vessels are more likely to participate in the following year, and they exhibit a smaller coefficient of variation in gross revenue. Overall, our measure of diversification is conceptually sound and can be used as an alternative to popular ex-post measures.