Effects of Government Quality and Institutional Choice on Efficiency of the U.S. Commercial Airports

Abstract

Major commercial airports in the U.S. are operated by local governments either directly as government branches or indirectly via airport or port authorities. Recent research has uncovered that those institutional arrangements on airport governance structure matter for airport efficiency. In this paper, we test the hypothesis that connects efficiency of airports to government quality measured by degree of corruption. We first develop a theory which predicts the impacts of corruption on productivity and variable input allocation of airports under the three alternative institutional arrangements being used in the United States. We then test the predictions by estimating a stochastic variable cost frontier model which incorporates both technical and allocative efficiency of airports. The empirical evidences confirm the theoretical predictions by revealing the following: (1) in the absence of corruption, productivity of airport authorities is significantly higher than that of city-owned and operated airports; (2) corruption is found to lower productivity of airport authorities but not to affect productivity of airports under other two institutional choices; (3) in the absence of corruption, airports under all the three institutional arrangements over-utilize direct labor relative to non-labor inputs including outsourcing of services; and (4) corruption lowers the degree of the relative over-utilization of labor inputs in airports.