Economic Cycles and Regulatory Compliance: A Bidirectional Analysis of Vessel Detentions Under Port State Control

Port State Control (PSC) inspections play a critical role in enforcing international maritime safety and environmental standards, yet little is known about how compliance behaviour interacts with economic cycles. This study examines the relationship between vessel detentions and freight market conditions using monthly data from the Paris and Tokyo Memoranda of Understanding (MoUs) over the period 2010–2021. A system of simultaneous equations is estimated using the Generalized Method of Moments (GMM) and Three-Stage Least Squares (3SLS) to address the bidirectional relationship between detention activity and freight market conditions, proxied by the Baltic Dry Index (BDI) and, for tanker specifications, the Baltic Dirty Tanker Index (BDTI). The results are consistent with a positive and statistically significant bidirectional relationship: vessel detentions increase during periods of strong freight market conditions, while past detentions are positively associated with freight rates, a pattern consistent with a signalling and sentiment channel. Institutional factors, including flag state quality, classification society affiliation, and ISM-related deficiencies, are also found to significantly influence detention risk, though their direction and magnitude vary across MoUs and vessel segments. These findings are consistent with the presence of opportunistic incentives during economic upswings, challenging the conventional expectation that stronger market conditions promote higher compliance. The study contributes to the literature by linking regulatory compliance with economic cycles and highlighting the importance of adaptive, risk-based enforcement strategies. It is important to note, however, that the aggregate nature of the data does not permit direct identification of firm-level behavioural mechanisms, and the findings should be interpreted as associational evidence consistent with these theoretical mechanisms.