Seaport's investment under disaster information asymmetry between public and private operators

This paper analytically examines a seaport's capacity and adaptation investments when faced with disaster risk. A landlord port is studied, which is consisted of an upstream public port authority and a downstream terminal operator (public or private). Compared to public sectors (i.e., the public port authority and public terminal operator), the private terminal operator possesses more accurate disaster information that is obtained from its richer experience from global port operations and more resources/willingness to acquire such information. With the private terminal operator, the public port authority can be updated with more accurate disaster information. A two-stage game is solved, with the public port authority making capacity and adaptation investments at the first stage, and the terminal operator setting port charge/output to shippers at the second stage. Our analytical results suggest that the more accurate disaster information offered by the private terminal operation can help port authority rationalize its investments (both capacity and adaptation), benefiting the social welfare. But the private terminal operator is also intended to abuse the monopoly market power by raising service charge. Especially when the market size is high, such negative effect of market power abuse dominates and the benefits of more accurate disaster information, harming the social welfare and shipper surplus. The accurate disaster information of private terminal operator is more valuable when its revealed disaster risk is lower than public sector's perception. This would encourage port's capacity and adaptation investments to approach the socially optimal level. However, such more accurate information is less valuable if it suggests a high disaster risk, or when the adaptation investment cost is high. In this case, the public port authority is still reluctant to raise adaptation investment with such more accurate information. To summarize, when faced with disaster information asymmetry, the port authority should consider privatizing terminal operations either when the market size is small, or when the adaptation investment cost is low.