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

In: Airline Economics in Asia

Author

Listed:
  • Katsuya Hihara
  • Naoki Makimoto

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.

Suggested Citation

  • Katsuya Hihara & Naoki Makimoto, 2018. "Analyses of Risk-sharing Contract of Airport and Airline Vertical Relationship: Bargaining and Agency Analyses," Advances in Airline Economics, in: Airline Economics in Asia, volume 7, pages 267-286, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:aiaezz:s2212-160920180000007014
    DOI: 10.1108/S2212-160920180000007014
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    More about this item

    Keywords

    Airport–airline vertical relationship; risk sharing; incentive design; nash bargaining solution; dynamic programming; load factor guarantee mechanism; C70; D81; D86; L93;
    All these keywords.

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation

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