Investor Valuations of Inattention Rents

• In Event: Behavioral Firms and the Tax System

Abstract

Recent Administrations have made halting progress in regulating the advertising of tax- and fee-inclusive pricing. In prior work (Bradley and Feldman, 2020), we documented substantial reductions in ticket tax pass-through rates and reduced passenger demand following the implementation of full fare advertising rules (FFAR), which required airlines and OTAs to advertise ticket prices on a tax-inclusive basis. More recently, President Biden’s 2023 SOTU address pledged to tackle the proliferation of so-called “junk fees” in numerous areas. While some of these pledges have come to fruition in the form of federal regulation or litigation, other actions have been stopped or rescinded.

Despite widespread evidence of consumer inattention and salience effects on prices and consumer demand in the literature, little is known about the degree to which the strategic use of low-salience add-on fees and other forms of partitioned pricing contribute to firm profitability. In this paper, we study investor reactions in the U.S. stock market to several regulatory, legislative, and litigation-related events in order to quantify what we refer to as “inattention rents.”

Preliminary results surrounding the Department of Transportation’s notice of FFAR imply 3-day cumulative abnormal returns of approximately -4% among domestic U.S. carriers. Foreign carriers and cargo/leasing operators that were either minimally or unaffected by FFAR experienced no such effects. Proposed legislation related to other forms of “junk fees” and targeted litigation involving the display of accommodation taxes fees have more muted effects.

Authors

• Sebastien J Bradley, Drexel University

• Naomi Feldman, naomi.feldman@mail.huji.ac.il