Preventing Environmental Disasters in Investment under Uncertainty

The paper considers a firm that has the option to invest in a project with an unknown profitability, which is affected by general market uncertainty. The project has the adverse effect that it can cause environmental damage. In case the firm has the option to undertake preventive investment at the time of market entry, we get that preventive investment is significant when (i) the project revenue is large, (ii) the environmental incidents potentially cause a huge reduction of firm value, and (iii) when preventive investment substantially decreases the probability of environmental damage occurrence. The optimality of such a preventive investment results in a significant delay of the project investment. When the firm has the possibility to invest in the project first and do the preventive investment later, this will accelerate the project investment and will result in a larger preventive investment when it indeed will decide to do that one later.

RISK TRANSMISSION AND CONTROL OF PORT-HINTERLAND SERVICE NETWORK: FROM THE PERSPECTIVE OF PREVENTIVE INVESTMENT AND GOVERNMENT SUBSIDIES

The increase in risk prevention investments in the port-hinterland service network (PHSN) effectively enhances the network’s ability to resist risks and improve the sustainability and stability of ocean transportation. Based on the construction of the PHSN risk prevention investment utility model, the equilibrium strategy, the related characteristics of each participant in the complementary networks and the complete network are analyzed. Similarly, the subsidy policy of the government under the utility maximization of the whole service network is studied. We further propose new types of subsidy strategies based on the key nodes and key groups given the resources available and the subsidy efficiency constraints imposed, while also validating the advantages of this method based on a case analysis. The results indicate that the (1) equilibrium risk prevention investment is closely related to the Katz-Bonacich centrality, network interaction intensity, cost of unit risk prevention investment and competition intensity; (2) an undifferentiated subsidy strategy cannot improve the risk prevention effectiveness of the whole network; (3) the subsidy strategy based on key nodes and key groups effectively improves the risk prevention efficiency; and (4) the subsidy strategy of key groups is superior to the subsidy strategy of key nodes. Accordingly, the results of this study provide a reference for participants and managers in the PHSN when making risk prevention investment decisions.