Open registry shipping : an econometric study of the cost structure of open registry shipping and its impact on freight rates

Whilst the issue of open registry shipping has constituted one of the greatest controversies in the shipping industry over the last thirty years, no detailed quantitative work has been carried out on the issue. In this thesis transcendental logarithmic cost functions are estimated for the production functions of open registry bulk ships and those operating under traditional maritime nations. In this way an appropriately unrestricted cost function for the flag dichotomy is estimated and the parameters of the cost functions provide the basis for determining the structure of the production technology of tankers and bulk carriers under the two· flag groupings. Evidence of scale economies and the extent to which they have been exploited by each flag group is provided along with factor substitution patterns, own-price and crossprice factor demand elasticities. It is found that the costs of bulk carriers operating under open registries are lower for all vessel sizes than for those operating under traditional registries. For tankers/open tegistry costs are found to be higher for product tanker services and lower otherwise. The translog estimates reveal that the manning cost element is the greatest contributor to the cost differential between the two groups. Open registry operations are also found to be subject to greater factor substitution flexibility. Statistical analysis of tanker and bulk carrier time charter freight rates over a ten-year period provides empirical evidence for the hypothesis that lower open registry costs are passed on to consumers of shipping services by way of lower freight rates. For this reason, a methodology for measuring this benefit is suggested. It is concluded that whilst this study provides evidence of the possible cost to international trade of phasing out open registries, such cost of itself does not provide an argument for retaining the system. The social and economic rationality of retaining the system will be determined by a wider cose-benefit analysis to which this study has contributed