Debt, moral hazard and airline safety An empirical evidence

Abstract For many years, there has been a proliferation of theoretical articles on ex-ante moral hazard without any strong empirical measure of its effect on resource allocation. In this article, we present a detailed analysis of the relationship between the financial structure of airlines and the private safety decisions of managers. We show that an increase in the debt-equity ratio is theoretically ambiguous on safety: there is a trade-off between efficiency in investment and moral hazard. All estimated models do not reject the Poisson distribution assumption. Many financial variables are significant when explaining the distribution of accidents. More particularly, our results indicate that the moral hazard effect on safety is dominated by the investment effect for carriers in good financial conditions, while the moral hazard effect dominates for those experiencing financial difficulties.

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