Quality disclosure when firms set their own quality targets

Abstract

We investigate how firms adjust their target quality levels when they - or their competitors - become subject to an information disclosure requirement. Our setting is the U.S. airline industry, where all large domestic carriers are required to report their on-time performance (OTP). OTP is measured by comparing a flight’s actual arrival time to its scheduled arrival time, which is chosen by the airline. Therefore, airlines can improve their OTP by simply increasing their scheduled flight times. We study three airlines which become subject to the disclosure requirement and find that they lengthen their schedule times by 1.4 min on average. Moreover, other airlines also increase their schedule times on routes where they compete with newly reporting airlines, by about 2.3 min, while actual flight times remain unchanged. While these numbers are small, the longer schedule times translate into a 15% improvement in OTP for previously reporting airlines. We conclude that newly reporting airlines and their direct competitors adjust their quality targets when they become subject to quality disclosure, which improves their reported quality without improving the actual time that it takes to travel from gate to gate.