Does institutional quality matter for offshore supply rates? : an empirical analysis of the relationship between costs and institutional quality, as evidenced by day rates in the PSV market 1995-2013

Abstract

The role of institutions for long-run economic development is widely recognized as important. However, we have limited knowledge about how institutional quality systematically influence prices in a specific market. This thesis investigates the relationship between a country’s institutional quality and day rates in the global offshore supply vessel market. Two hypotheses constitutes the starting point for investigating this relationship. One, there are arguments suggesting a negative association between institutional quality and costs, i.e. higher costs in countries with low quality institutions due to higher operational risk. Two, at the same time there are arguments suggesting a positive effect, i.e. higher costs in countries with high institutional quality, because these countries in general are more expensive. Using proprietary offshore market data, I find that there is a positive correlation between a country’s institutional quality score and earned day rates. Furthermore, I investigate through what channels this correlation works. I find that institutions influence day rates through the positive correlation between institutions and economic development. Because of the presence of competition across countries, we would expect costs and prices to become equal across countries. However, it seems that prices of offshore services may be higher in richer countries due to the substantial presence of non-tradables. Lastly, I follow Acemoglu and Johnson (2005) in their unbundling of institutions. By using proxies for property rights institutions and contracting institutions, I find that institutional quality matter in the form of property rights institutions, and that the latter has no influence on day rates. The thesis also offers qualitative discussion of the results.