Optimal transport provision to a tourist destination: A contract theory perspective

Abstract

How to provide transport infrastructure to a tourist destination optimally is a salient question in tourism economics. Even so, this question has received no theoretical attention in the literature. Hence, we use contract theory to provide the first theoretical analysis of the optimal provision of transport infrastructure by an asymmetrically informed tourist agency (TA) interested in promoting a particular destination to tourists. Specifically, we first delineate our model and then solve for the first-best contract describing the interaction between the TA and a transport infrastructure providing firm. Second, we study the optimal second-best contract with asymmetric information when the above firm can be of two possible types. Third, we generalize the previous analysis by analyzing the case in which the firm can be of infinitely many types. Finally, we note that policy makers can reduce the negative effects of asymmetric information in practical settings by engaging in underwriting or obtaining additional information, by asking the firm to provide references, and by inspecting past transport infrastructure projects completed by the firm.