Airport incentive regulation in practice

This paper examines the complexities of incentive regulation in the context of airport privatization, asymmetric information, and regulatory weakness in a developing country. Using hybrid Dual-Till revenue cap variations of thirty-four concessioned airports in Mexico for the period 2006-2019, we distinguish within and between regulated period effects on productive efficiency. Our findings reveal a dual nature of variations: negative shifts within regulated periods are linked to heightened productive efficiency, whereas positive shifts between regulated periods, particularly during the resetting of caps, arise when projected demand falls short of covering allowed operational and capital expenditures. This discrepancy leads to a decline in productive efficiency. The analysis highlights discernible weaknesses in the regulatory framework such as homogenous expectations of efficiency gains across all airports within regulated periods. Furthermore, strategic behavior by airports emerges, as they opt to defer efficiency enhancements to the initial year of any given regulated period. We discuss regulatory levers to improve the quality of regulation.