Analyses of Risk-sharing Contract of Airport and Airline Vertical Relationship: Bargaining and Agency Analyses

Katsuya Hihara and Naoki Makimoto

A chapter in Airline Economics in Asia, 2018, vol. 7, pp 267-286 from Emerald Group Publishing Limited

Abstract: The relationship between airline and airport is complex, fascinating, and wide open for new research endeavors. In Volume 6 of the series, we conducted the analyses of risk-sharing contract between airline and airport from numerical risk balance assessment and incomplete contract theory perspectives based on an interesting real example of risk-sharing contracts, the Noto Airport Load Factor Guarantee Mechanism (LFGM) contract in Japan. In this chapter, we further advance the analyses of risk-sharing contracts, based on the real example of Noto LFGM contract, from the perspectives of game theory and principal-agent theory. The risk-sharing arrangements, such as LFGM contract, are relevant to the rapidly changing business environment in Asia’s aviation industries. We conduct a two-stage game analysis. The first phase is the contract negotiation phase and the second phase is the effort-making phase after signing the contract. We show that the two parties can attain a Pareto optimal utility level by bargaining a simple linear risk-sharing contract in the contract negotiation phase based on the equilibrium effort levels in the effort-making phase.

Keywords: Airport–airline vertical relationship; risk sharing; incentive design; nash bargaining solution; dynamic programming; load factor guarantee mechanism; C70; D81; D86; L93 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eme:aiaezz:s2212-160920180000007014

DOI: 10.1108/S2212-160920180000007014

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