Securing Containerized Supply Chain through Public and Private Partnership

Global trade is seafaring commerce: 90\% of traded goods are carried by maritime transport that has become vulnerable to security risks. This has led governments to initiate security programs serving tens of thousands of members worldwide. This paper studies the government’s incentive design and the interaction between Customs inspection capacity and the incentives offered in security programs. Using the theory of incentives, we examine the value of a partnership elevating containerized supply chain security. We have developed a sequential game featuring the government, firms, and an adversary. The government selects the inspection capacity and incentives to foster the partnership, namely, an operational benefit in the form of a reduced inspection rate, and a security benefit obtained through reductions in the risks of adversarial infiltration. Firms subsequently decide on the collaboration level, followed by a strategic adversary’s decision to infiltrate. Using the adversary’s best response, we show that, in equilibrium, the government ranks all the firms and induces collaboration with only a subset of them. We demonstrate that, in equilibrium, while security incentives may benefit all participants, tailored operational incentives should be offered strictly to foster collaboration. The required condition to implement the inspection-free lane for members is also characterized. Our results also inform practice to help security policymakers understand the underlying interaction between Customs inspection capacity and incentive design in forging collaboration with private firms. In particular, since firms opting for collaboration experience lower inspection rate, this further reduces overall congestion that, in turn, creates a positive externality for nonmember firms. Therefore, having excess inspection capacity may yield briefer wait times that could dissuade firms from collaborating