Salient or Not? The U.S. Air Travel Taxes

Abstract

We exploit the abundance of tax changes in the airline industry after the DOT's full-disclosure rule. We determine the "effective" tax rate and analyze how passengers reacted to the tax changes. Hausman-type instruments are used to address the problems arising from endogenously determined prices. We show that passengers react more strongly to taxes than to price changes. In addition, this response is stronger if the airport (of origin) is close to a nearby airport with more connections available. This over-optimization parameter decreases as the passenger level increases. Significant differentials in the parameter are found for different carrier types. Hub status also appears to be a factor in shaping salience, particularly at the origin airport. Neither market structures nor competition seem to generate significant differentials. We extend the literature by examining the salience of air travel taxes and providing potential explanations for sources of over-optimization.