Terrorism and the Alchian-Allen Theorem

Abstract

The Alchian-Allen “effect” occurs when the fixed cost of purchasing a good is altered. Initially fixed costs imposed on consumers of airline flights due to terrorism were low. Coach airfares increased relative to business and first class fares due to security costs. Since air fares are flexible, the ratio of coach fares to business or first class fares should fall. Using quarterly fare data for the period 1995-2005 from DOT’s Database 1B, analysis shows a significant effect on relative shares of air travel. The sign of the effect is negative indicating that first class declined relative to coach travel