How should ports share risk of natural and climate change disasters? Analytical modelling and implications for adaptation investments

Abstract

This study theoretically examines disaster adaptation investments under risk of natural disasters. Given two neighboring, competitive ports, the disasters may cause independent damages to either port, or to both ports simultaneously; consequently, some shippers avoid loss by using the unaffected port if an independent disaster occurs in their local port. Since such inter-port risk sharing benefit increases with the share of independent disasters in all disasters, the socially optimal investment decreases with the disaster independence. However, the risk sharing benefit only attributes to the shippers' surplus and does not attribute to profits from the port management, so it does not affect investment of private port authorities that maximize the profits. Such an ignorance of the risk sharing benefit by the private port authorities is likely to lead to underinvestment in disaster adaptation facilities under a lower disaster independence.