Testing for Moral Hazard at the Tourist Destination

Abstract

The business of package tours has seen a wide range of inferior quality, including tour operators’ misrepresentation of product information, default on contracted services, misguiding consumptions and deceitful dealings at the destination, and what is called “zero-fare” group toms in the Chinese context. Drawing upon the Lemons problem that regards asymmetric information as the fundamental cause of inferior quality, this study presents a model of moral hazard in package tours to conceptualize the broad range of inferior quality supplied at the destination. Empirical investigation of the model was carried out in China’s outbound tourism market, in which data were collected by administering a cross-sectional survey to Chinese package tourists. This study bas predicted that the variation in service quality is greatly explained by the inclusion of tourists’ knowledge of inbound tour operators’ effort in the model to denote the effect of asymmetric information on the tourists’ side. On the other hand, it has verified the positive relationship between the decrease of asymmetric information and the improvement of service quality, and hence indicating moral hazard. This study therefore has shown the model of moral hazard being of validity and empirical significance in accounting for inferior quality at the destination.