Risk and investment decisions in non-liner shipping

Abstract

The investment decisions of non-liner shipping firms based on their behaviour towards risk, stochastic demand for capacity, inelastic supply and foregone profits are discussed. These aspects are formalized in a simple stochastic model, which, together with definitions of two broad categories of risk behaviour, is then used to examine and contrast the investment decisions of the two different strategic groups. The analysis shows that the capacity expansions/investments sought by the risk averter and the risk lover will differ under ‘normal’ circumstances with the risk averter having significantly less capacity than the risk lover. The risk lover will have higher capacity in a volatile market than in a stable market situation. During periods of high capital costs, the investment decisions of the two risk groups tend to be indistinguishable.