Incentives in cruise terminal concession contracts

Abstract

Concession contracts are widely used to structure the relationship between public managing bodies of ports and entities that are granted the right to operate a terminal at a given port. This study initiates research on incentives in cruise port/terminal concession contracts by combining managerial insights with a more economic approach using game theory perspectives. It first outlines the conflict of interests between port authority and the contracting parties, demonstrating that, due to asymmetric information, a terminal operator might engage in activities that are undesirable from a port authority standpoint after the concession agreement is signed. Thus, incentives are needed to guarantee that the terminal operator does not only act on its own interest, but also take into account the managerial objectives of the port authority. A case-study of the Port of Galveston, Texas, is presented to provide an example of an existing incentive mechanism in place with provisions related to assignment and renewal of berth and terminal usage, fees, and the minimum passenger guarantees. Based on these managerial considerations, the case also points to key factors to be incorporated if cruise lines' behavior and moral hazard problems are modeled following a more economic approach based on game theory.