The effects of information publicity and government subsidy on port climate change adaptation: Strategy and social welfare analysis

Abstract

This paper develops an integrated economic model to examine two competing ports’ investment in adaptation to climate-change disasters. The ports have asymmetric information on the actual disaster damage. In deciding on adaptation investment, the “leader” port is a better-informed first mover and the “follower” port is a less-informed follower. The government is able to acquire and verify port adaptation information and chooses whether to publicize it (publicity policy) or keep it confidential (confidentiality policy). If the information is publicized, the leader port initiates a signaling game in which it makes a decision first, and the follower acts after observing the leader's decision. Under the confidentiality policy, both ports make their decisions simultaneously. Our analysis shows the following. 1) Under the publicity policy, the leader port does not adopt a pooling strategy; rather, it determines its adaptation and output based on true information on disaster damage (i.e., it implements a separating equilibrium). 2) The publicity policy has two effects: it increases the leader's throughput while decreasing the follower's throughput (i.e., the throughput effect), and it helps rationalize the follower's adaptation investment by making more up-to-date disaster information available (i.e., the adaptation investment effect). 3) When the degree of inter-port competition is high, the publicity policy improves social welfare by increasing the total throughput of the two ports (i.e., an overall positive throughput effect) and rationalizes the follower's adaptation investment (i.e., a positive adaptation investment effect). Otherwise, it reduces the total throughput of the ports (i.e., an overall negative throughput effect). This negative throughput effect may outweigh the positive adaptation investment effect, thereby reducing social welfare. These analytical results suggest that the government needs to promote inter-port competition if it decides to publicize port adaptation information. Finally, we find that the joint implementation of publicity and subsidy policies could result in excessive adaptation investment, leading to social welfare loss. Our study illustrates the important effects of information asymmetry on adaptation investment and has policy implications in the presence of port competition and government subsidy.