TY - JOUR
T1 - Subsidy on transport adaptation investment – modeling decisions under incomplete information and ambiguity
AU - Zheng, Shiyuan
AU - Wang, Kun
AU - Chan, Tung Sun
AU - Fu, Xiaowen
AU - Li, Zhi-Chun
N1 - We are very grateful to three anonymous reviewers and editor Robin Lindsey, whose comments have led to a significant improvement of the paper. Financial supports from the National Natural Science Foundation of China (71901065, 72031005, 72072113, 72131008), Social Science Foundation of Ministry of Education of China (19YJC790136), the Hong Kong Polytechnic University (Grant P0035755 - UAKR), Fundamental Research Funds for the Central Universities in UIBE (CXTD11-06) are highly appreciated.
PY - 2022/8
Y1 - 2022/8
N2 - This paper models subsidy policies on transport facility's adaptation to climate change-related disasters under the government's incompleteness and ambiguity of disaster information. We consider a transport facility (an airport or a seaport) that is in a vertical structure with an upstream facility operator and a few downstream carriers. The exact probability of disaster damage level is privately known by the facility operator, while the government has incomplete information and has to form a probability distribution. If the government cannot accurately perceive such probability (misjudgment), ambiguity emerges. This is the first modeling work to integrate the incomplete information and ambiguity in one framework to analyze the transport investment under uncertainty. Modeling results suggest that such incomplete information and ambiguity in many cases allow the facility operator to secure information rent, and make the facility output, adaptation investment and social welfare downwardly distorted (i.e., less than the levels under complete information). The ambiguity can bring two countervailing effects under incomplete information, namely the “pooling effect” and the “agency cost effect,” which jointly determine the downward distortions on market outcomes and the welfare-maximizing subsidy policy. When its degree is low, the ambiguity causes a more dominant “pooling effect” that can help alleviate the distortion, improving social welfare. In presence of ambiguity, the increasing optimism of the government would deteriorate the distortion, likely to damage social welfare. Our analytical results provide support to subsidy on adaptation and policies to promote adaptation effectiveness and carrier competition in downstream market. To alleviate possible distortion, the government also needs to be cautious to reduce ambiguity through more information acquisition, and not be too optimistic on the disaster damage.
AB - This paper models subsidy policies on transport facility's adaptation to climate change-related disasters under the government's incompleteness and ambiguity of disaster information. We consider a transport facility (an airport or a seaport) that is in a vertical structure with an upstream facility operator and a few downstream carriers. The exact probability of disaster damage level is privately known by the facility operator, while the government has incomplete information and has to form a probability distribution. If the government cannot accurately perceive such probability (misjudgment), ambiguity emerges. This is the first modeling work to integrate the incomplete information and ambiguity in one framework to analyze the transport investment under uncertainty. Modeling results suggest that such incomplete information and ambiguity in many cases allow the facility operator to secure information rent, and make the facility output, adaptation investment and social welfare downwardly distorted (i.e., less than the levels under complete information). The ambiguity can bring two countervailing effects under incomplete information, namely the “pooling effect” and the “agency cost effect,” which jointly determine the downward distortions on market outcomes and the welfare-maximizing subsidy policy. When its degree is low, the ambiguity causes a more dominant “pooling effect” that can help alleviate the distortion, improving social welfare. In presence of ambiguity, the increasing optimism of the government would deteriorate the distortion, likely to damage social welfare. Our analytical results provide support to subsidy on adaptation and policies to promote adaptation effectiveness and carrier competition in downstream market. To alleviate possible distortion, the government also needs to be cautious to reduce ambiguity through more information acquisition, and not be too optimistic on the disaster damage.
KW - Transport facility
KW - Adaptation investment
KW - Incomplete information
KW - Ambiguity
KW - Subsidy
UR - http://www.scopus.com/inward/record.url?scp=85131460110&partnerID=8YFLogxK
U2 - 10.1016/j.trb.2022.05.016
DO - 10.1016/j.trb.2022.05.016
M3 - Journal article
SN - 0191-2615
VL - 162
SP - 103
EP - 129
JO - Transportation Research, Series B: Methodological
JF - Transportation Research, Series B: Methodological
ER -