Coalition Formation with Externalities: The Case of the Northeast Atlantic Mackerel Fishery in a Pre- and Post-Brexit Context

Abstract

The partition function approach is applied to study coalition formation in the Northeast Atlantic mackerel fishery in the presence of externalities. Atlantic mackerel is mainly exploited by the European Union (EU), the United Kingdom (UK), Norway, the Faroe Islands and Iceland. Two games are considered. First, a four-player game where the UK is still a member of the EU. Second, a five-player game where the UK is no longer a member of the union. Each game is modeled in two stages. In the first stage, players form coalitions following a predefined set of rules. In the second stage, given the coalition structure that has been formed, each coalition chooses the economic strategy that maximizes its own net present value of the fishery, given the behavior of the other coalitions. The game is solved using backward induction to obtain the set of Nash equilibria coalition structures in pure strategies, if any. We find that the current management regime is among the stable coalition structures in all eight scenarios of the four-player game but in only one case of the five-player game. In addition, stability in the five-player game is sensitive to the growth function applied and the magnitude of the stock elasticity parameter.