Incentives and Competition in the Airline Industry
55 Pages Posted: 4 Feb 2016 Last revised: 5 Apr 2019
Date Written: April 3, 2019
We examine how performance changes at airlines in response to a change in executive incentives. Airlines with executive bonuses contingent on on-time arrival do improve on-time performance. We find evidence of strategic gaming of the incentive as some carriers increase scheduled flight times, making it easier for flights to arrive on-time. This effect is more pronounced on competitive routes. Carriers also do not decrease the frequency of flights or the number of passengers to make it easier to be on-time, but they do slightly decrease fares. Competitors on the same routes also improve their on-time performance, even when their executive bonuses are not contingent on on-time performance, consistent with competition in strategic complements.
Keywords: Incentives, Competition, Airlines
JEL Classification: G30, G34, G32
Suggested Citation: Suggested Citation