Incentives and Competition in the Airline Industry

55 Pages Posted: 4 Feb 2016 Last revised: 5 Apr 2019

See all articles by Rajesh K. Aggarwal

Rajesh K. Aggarwal

Northeastern University

Carola Schenone

University of Virginia - McIntire School

Date Written: April 3, 2019

Abstract

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

Aggarwal, Rajesh K. and Schenone, Carola, Incentives and Competition in the Airline Industry (April 3, 2019). Available at SSRN: https://ssrn.com/abstract=2727189 or http://dx.doi.org/10.2139/ssrn.2727189

Rajesh K. Aggarwal

Northeastern University ( email )

413 Hayden Hall
360 Huntington Avenue
Boston, MA 02115
United States

Carola Schenone (Contact Author)

University of Virginia - McIntire School ( email )

Rouss and Robertson Halls
125 Ruppel Drive
Charlottesville, VA 22903
United States
434-924-4184 (Phone)

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