Reaching for Gold: Frequent-Flyer Status Incentives and Moral Hazard

45 Pages Posted: 30 Nov 2018

See all articles by A. Yesim Orhun

A. Yesim Orhun

University of Michigan, Stephen M. Ross School of Business

Tong Guo

Duke University, Fuqua School of Business

Date Written: November 22, 2018

Abstract

We study whether and how frequent-flyer program members change their purchase behaviors as they progress towards achieving elite status. We find that as travelers stretch to attain status with the airline, they become more likely to choose it even when it is less appealing than its competitors. They also become more willing to pay higher prices than they otherwise would. Consumers are sophisticated about when to make such tradeoffs. If their progress falls significantly behind the pace required to attain status by the end of the year, such that their chances of attaining status seem low, they are less likely to sacrifice current utility. If their progress is substantially ahead of the target pace, they are also less likely to sacrifice utility. We document a stronger willingness to pay response among business travelers than among leisure travelers. Moral hazard explains a substantial part of the response differences between business and leisure travelers. Across all members, it accounts for one-third of the increase in willingness to pay in response to making progress towards attaining status. We estimate that companies would save at least 7% on their travel costs if their employees did not exhibit moral hazard. Overall, our results suggest a significant role of moral hazard in the success of frequent-flyer status incentives.

Keywords: Loyalty Programs, Tiered Status Incentives, Moral Hazard

Suggested Citation

Orhun, A. Yesim and Guo, Tong, Reaching for Gold: Frequent-Flyer Status Incentives and Moral Hazard (November 22, 2018). Available at SSRN: https://ssrn.com/abstract=3289321 or http://dx.doi.org/10.2139/ssrn.3289321

A. Yesim Orhun (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Tong Guo

Duke University, Fuqua School of Business ( email )

United States

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