Adaptation to climate change effects and competition between ports: Invest now or later?

We investigate the size and timing of investment in adaptation to climate change effects for ports, when efficiency of investment is uncertain and the market is competitive. We develop a two-period real options game model with two “landlord” ports, each consisting of a port authority (PA) and a downstream terminal operator company (TOC). The two PAs compete with each other at the upstream level, and the two TOCs downstream. The model assumes an accumulation of information about the adaptation projects over time, allowing decision-makers to improve the investment efficiency. The results show that the optimal timing of investment is significantly influenced by the disaster occurrence probability, the potential information gain over time and the level of competition. When competition is intensified, it is optimal for ports to invest earlier than later. However, immediate investments are less preferred when competition is weak, even lesser in the presence of information accumulation. Waiting until the next period to invest is also a better option if the disaster occurrence probability is low or if the shippers’ expected disaster losses are negligible. Moreover, information accumulation reduces the ports’ investment size, while improving the discounted welfare associated with late investments. These results hold for both the private and public ports and for simultaneous investments by the PAs. In most cases, social welfare is much higher with immediate investments, mainly because of the associated positive spillover effects on the surrounding areas and other sectors of economy. The implications of the assumption of Knightian uncertainty for the disaster occurrence probability are discussed.