Flag choice and Port State Control inspections—Empirical evidence using a simultaneous model

Abstract

Flag choice and Port State Control (PSC) inspection are two of the most important and mutually dependent aspects of shipping policy. Estimating the effects that various outside factors have on both the flagging out decision and the PSC inspection rate can help with determining appropriate policies for improving maritime safety. However, studying the impact of one on the other without taking into account their endogenous effect could result in biased estimations. This paper integrates a binary logit model for flagging out decisions, and a linear model for explaining the PSC inspection rate, in a Three-stage Least Square framework, by combining actual ship registration data from the Lloyd׳s ship register with the corresponding PSC inspection records from Paris MOU, Tokyo MOU, and India MOU. The empirical results show that PSC inspections actually increase the possibility of flag-out, not only because of the high inspection rate, but also through the variables used in setting the inspection priority, such as ship age. Estimation biases are also identified if endogeneity is neglected, such as the contribution of ship type, ship size, and PSC inspection rate to the flag-out behavior, as well as the importance of flying a foreign flag on the PSC inspection priority.