Over-capitalization in fisheries with irreversible investment and factor substitution

A major problem for common pool resource regulation, such as fisheries management, is over-capitalization following investment irreversibility. Understanding theoretical implications of capital as an irreversible investment input better could help to avoid over-capitalization. This article analyzes the case where irreversibly invested capital can be substituted by flexibly adaptable inputs such as labor and fuel in a CES production function. Using Hamiltonian derivation and numerical simulation, I compare investment under open access and under a social planner case across different levels of factor substitutability. For reasonably large ranges of parameter values, initial over-capitalization is stronger for weaker substitution possibilities. This is caused by differential open access investment incentives, in particular due to faster initial reduction in biomass. Despite lower initial over-capitalization, better substitution possibilities may lead to a lower minimum biomass during transition, threatening biological sustainability. Policy-makers therefore should be aware of these twofold impacts.