Quality incentives pay-off?

Abstract

Intermediaries ascertain vessel quality in shipping markets. Thus, the classification societies set minimum quality requirements for trading vessels. Minimum class requirements do not differentiate between high quality and normal quality vessels. This reduces shippers’ willingness to offer higher freight rates for high quality vessels since they cannot identify these vessels. In this paper, we exploit theories on asymmetric information and incentive contracts to induce "flagging" of vessel quality. We analyse how both self-selection and credible signalling of vessel quality may be used to overcome asymmetric information. The object of this paper, is to identify contract requirements that may induce owners to increase vessel quality .We suggest charter contracts that allow shipowners to implicitly signal vessel quality. Shippers may use contracts that induce self-selection by operators in charter markets. Ports also may use pricing strategies to induce self-selection among ship operators.