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Assignment: Dealing with Risk, Asymmetric Information, and Incentives
Due Week 9 and worth 310 points
Earlier in the quarter we discussed Southwest Airlines’ use of game theory to create new strategy. Continue to research Southwest Airlines or a company of your choice and write a six to eight (6-8) page paper in which you:
Evaluate a company’s recent (with in the last year) actions dealing with risk and uncertainty.
Offer advice for improving risk management.
Examine an adverse selection problem your company is facing and recommend how it should minimize its negative impact on transactions.
Determine the ways your company is dealing with the moral hazard problem and suggest best practices used in the industry to deal with it.
Identify a principal-agent problem in your company and evaluate the tools it uses to align incentives and improve profitability.
Examine the organizational structure of your company and suggests ways it can be changed to improve the overall profitability.
Use at least five (5) quality academic resources in this assignment. Note: One of your references regarding your should have been published within the last 6 months. Note: Wikipedia does not qualify as an academic resource.
Your assignment must follow these formatting requirements:
Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.
Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length.
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Running head: RISK, ASYMMETRIC INFORMATION, AND INCENTIVES
Risk, Asymmetric Information, and Incentives
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RISK, ASYMMETRIC INFORMATION, AND INCENTIVES
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Risk, Asymmetric Information, and Incentives
Southwest Airlines Company is a major passenger U.S airline that offers scheduled air
transportation domestically and to nearby international markets. The company is the biggest
domestic carrier due to its low fares. It has reported profits for the forty-fifth consecutive year,
earning $3.5 billion with $2.1 billion profit in the previous financial year of 2017. This study
explores the company's actions in handling risks, ways of dealing with moral hazard problem,
principal-agent problem, adverse selection problem and the organizational structure.
Recent Actions Dealing with Risk and Uncertainty
Southwest Airlines just like any other airline company, faces risks and uncertainties.
These risks threaten their future statements and profitability. Some of the uncertainties facing the
company include high costs of aircraft fuel, effects of fuel hedging activities, and the possibility
of accidents. Further, there are risks of breaches of the information technology infrastructure,
labor issues, pending litigations, natural disasters, and competition from other airlines
(Southwest Airlines Co., 2018). This year the Airline experienced its first fatal accident in over
fifty-one years of service.
The company recently performed some activities to handle these uncertainties. It
inspected all their aircrafts especially the engines following the accident to prevent further
incidences. It launched new travel destinations with flights to Cincinnati/Northern Kentucky
International Airport, Owen Roberts International Airport in Grand Cayman and Providenciales
Airport in Turks and Caicos. These efforts are to offer its customers access to these areas and
deal with competition by venturing into new markets. It also completed the installation of a new
RISK, ASYMMETRIC INFORMATION, AND INCENTIVES
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single reservation system to enhance inventory management, flight scheduling, revenue,
additional international growth and enable operational capabilities to manage disruptions.
It retired its Boeing 737-300 planes, purchased the new Boeing 737 MAX which is more
fuel efficient. It also made changes to its delivery schedule to aid prospective growth
opportunities in the future. The company approved a collective bargaining agreement with the
Facilities Maintenance Technicians. It also plans to start selling tickets to service Hawaii on
approval by the Federal Aviation Administration (FAA) (Southwest Airlines Co., 2018). It
stren...
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