The Option to Change the Flag of a Vessel
The International Handbook of Maritime Economics, 47-62, 2011, Edward Elgar Publishing
Posted: 8 Feb 2014
Date Written: 2011
The objective of this paper, in recognition of the strategic significance of the ship registration decision, is to provide a theoretical framework that helps explain the interaction of factors that influence the decisions to register a 'flag of convenience.' This highlights the risk-return trade-off that is at its core. A decision problem is formulated as a switching option under the assumptions of uncertainty and costly reversibility. It is shown that the likelihood and timing of registry switching decisions can be affected by uncertainties over the level of savings in tax and labor costs that accrue from 'flagging-out,' as well as the level of correlation of a vessel's operation with the market portfolio. The authors' model shows that the optimal flag-switching policy for a maritime firm can be influenced by a number of factors and offers a practical method for assessing the available alternatives for fleet registration.
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