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

Airline Economics in Asia

ISBN: 978-1-78754-566-3, eISBN: 978-1-78754-565-6

Publication date: 14 December 2018

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.

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Acknowledgements

Acknowledgment

Financial support from the Airport Environment Improvement Foundations, Kansai International Airport Co., Ltd., Narita International Airport Co., Ltd. Japan Airport Terminal Co., Ltd., and JSPS KAKENHI Grant Number 16K03695 are gracefully acknowledged.

Citation

Hihara, K. and Makimoto, N. (2018), "Analyses of Risk-sharing Contract of Airport and Airline Vertical Relationship: Bargaining and Agency Analyses", Airline Economics in Asia (Advances in Airline Economics, Vol. 7), Emerald Publishing Limited, Leeds, pp. 267-286. https://doi.org/10.1108/S2212-160920180000007014

Publisher

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Emerald Publishing Limited

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