NCPA - National Center for Policy Analysis

How Do Firms Respond to Quality Disclosure Requirements?

August 19, 2015

Consumers often make product choices off quality ratings, and U.S. airlines recognize that their ratings, based off of "on time" flights, could be a deciding factor for customers when choosing an airline. The U.S. Department of Transportation began requiring large airlines to submit flight records in 1987.  These records are used to rate airlines based on the number of flights arriving "on time", which is defined as less than 15 minutes after the scheduled arrival time.

A high ranking is incentive for airlines to reduce delays. A recent study by the American Economic Journal highlights the possibility that airline employees intervene to prevent flights from arriving more than 14 minutes late. The study attempted to detect manipulation of the on-time threshold and discovered that many flights arriving exactly 15 minutes behind schedule were reassigned gates and ground crews to ensure the flight arrived only 14 minutes behind scheduled arrival time.

  • Five airlines established conditional monthly bonuses when airlines reached a certain level in performance rankings.
  • In some cases the incentives seemed to induce threshold behavior, previously nonexistent.

With pressure to not break the 15 minute threshold, airports that are more prone to delays, like Newark and O'Hare, could see a decline in the number of airlines servicing their locations. While quality disclosure is important for consumers to make informed decisions, investigating how the data is collected could reveal that firms are not operating as efficiently as possible.

Source:  "How Do Firms Respond to Quality Disclosure Requirements?"  American Economic Association. August 10, 2015.

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