Contract Form and Technology Adoption in a Network Industry

Abstract

This article investigates the relationship between transaction characteristics and contractual form as well as the role of technology adoption as a driver of variation in transaction characteristics. Our setting is the US airline industry, where many large airlines have outsourcing relationships with smaller regional carriers. In the late 1990s, fixed price contracts began to replace revenue sharing agreements as the dominant contractual form in these relationships. Moreover, this change coincided with the diffusion and adoption of a new aircraft technology, the regional jet. We present evidence that the new aircraft technology changed the set of flights that airlines subcontracted to their regional partners and did so in a way that favored the use of fixed price rather than revenue-sharing contracts. In particular, our results are consistent with the hypothesis that the new flights being subcontracted had characteristics that would have led to significant haggling costs under route-level revenue sharing. (JEL L14, D86, L22) The Author 2012. Published by Oxford University Press on behalf of Yale University. All rights reserved. For Permissions, please email: journals.permissions@oup.com, Oxford University Press.