Climate change, natural disasters and adaptation investments: Inter- and intra-port competition and cooperation

Abstract

This paper investigates disaster adaptation investments made by two ports competing for shippers in a common hinterland. Each port is a landlord type, consisting of a port authority and a terminal operator that both maximize profits. The probability of a natural disaster, which is related to climate change, is ambiguous at the start of an adaptation investment (Knightian uncertainty), but will be known after the lengthy investment. We examine the impacts of such Knightian uncertainty, inter-port and intra-port competition and cooperation on the port adaptation investments. We find that a high expectation of the disaster occurrence probability encourages port adaptation, while a high variance of the disaster occurrence probability discourages port adaptation. Furthermore, inter-port competition results in more adaptation investments (the “competition effect”), whereas within a port there is free riding on adaptation between the port authority and the terminal operator (the “free-riding effect”). We further extend our analysis to public port authorities that maximize social welfare, and find that the competition effect on port adaptation still exists but the free-riding effect is no longer present. As a robustness check, a Poisson jump process is also used to model disaster occurrence at the operation stage. We find, with this Poisson assumption, the effects of Knightian uncertainty on port adaptation still hold.