Does Information Publicity of Ports’ Adaptation Investments Improve Welfare?

Abstract

This paper develops an integrated economic model to examine two competing ports’ adaptation to climate-change disasters. The competing ports have asymmetric information on the actual disaster damage, with the “leader” port knowing the exact damage and the “follower” port knowing only its probability distribution. The government is able to acquire and verify port adaptation information, and chooses whether to publicize it (i.e., publicity vs. confidentiality policy). When 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 that: 1) Under the publicity policy, the leader port would never adopt a pooling strategy; rather, it would distinguish its adaptation and output based on the true disaster damage information (i.e., a separating equilibrium); 2) The publicity policy brings about two effects: it increases the leader’s output while decreasing the follower’s output (i.e., the output effect), and it also helps rationalize the follower’s adaptation investment with updated disaster information (i.e., the adaptation investment effect); and 3) When the degree of inter-port competition is high, the publicity policy improves social welfare by increasing the total port output (i.e., an overall positive output effect) and rationalizes the follower’s adaptation investment (i.e., a positive adaptation investment effect). Otherwise, it reduces the total port output (i.e., an overall negative output effect). This negative output effect may outweigh the positive adaptation investment effect, thereby reducing 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 a joint implementation of the publicity and subsidy policies could result in excessive adaptation investment, leading to welfare loss. Our study illustrates the important effects of information asymmetry on adaptation investments, and policy implications in the presence of port competition and government subsidy.

Keywords: Climate change-related disaster, Port adaptation, Asymmetric information, Information publicity, Subsidy