The Dynamic Oligopoly with Financing Friction: The U.S. Airline Industry after the Deregulation

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TOPIC:

The Dynamic Oligopoly with Financing Friction: The

U.S. Airline Industry after the Deregulation

ABSTRACT

The bankruptcy laws allow firms to unilaterally declare defaults, creating the conflict of interests between equity and debt holders. This externality causes inefficiency. In this paper, we study how the expectation of defaults after the U.S. airline deregulation act in 1978 affected the equilibrium interest rate schedule, airlines decisions, and the inefficiency of the industry. We also study the interaction between the effects of financing friction and the technological environment of the industry such as the expansion of the leasing market and the search friction in the second-hand aircraft market, and the effectiveness of hypothetical bailout policies. To do so, we develop an empirical dynamic oligopoly model with financing decisions where the strategic default causes financing friction. The model allows us to jointly analyze the product market as well as the asset and lending market. Using the estimated model, we demonstrate that the expectation of fire sale of aircrafts in the event of defaults substantially amplified the financing friction, while the existence of the leasing market mitigated it. A naive bailout policy always causes a net loss, and sometimes a huge loss to the economy because of the excessive investment by the airlines.

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PRESENTER

Kohei Kawaguchi

Hitotsubashi University

RESEARCH FIELDS

Industrial Organization

Microeconometrics

Quantitative Marketing

DATE:

23 Sept 2016 (Friday)

TIME:

4pm - 5.30pm

VENUE:

Meeting Room 5.1, Level 5

School of Economics

Singapore Management University

90 Stamford Road

Singapore 178903