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Capacity expansion under regulatory uncertainty:A real options-based study in international container shipping

Christian Haehl and Stefan Spinler

Transportation Research Part E: Logistics and Transportation Review, 2018, vol. 113, issue C, 75-93

Abstract: We present a real options model for capacity expansion that introduces uncertainty about potential future regulation (regulatory uncertainty) and key characteristics of capacity decisions: investment with time to build, divestment, the option to charter, and operating flexibility. Regulatory uncertainty is modelled as a possible jump in operating, investment, and charter costs during the simulation horizon. We find that regulatory uncertainty with grandfathering (the extant fleet is exempt from compliance) promotes high up-front investment leading to excess capacity and increased emissions. However, regulatory uncertainty without grandfathering reduces investment and emissions and the use of more flexible capacity options, such as chartering.

Keywords: Container shipping; Regulatory uncertainty; Environmental regulation; Approximate dynamic programming; Investment analysis; Capacity expansion (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:transe:v:113:y:2018:i:c:p:75-93