Security Mechanisms for Insolvencies in the Package Travel Sector: An Economic Analysis

Company insolvencies can lead to potential financial losses for consumers. Insolvency can clearly also create a severe problem for consumers who are disappointed because the travel that they were anticipating cannot take place or has to be interrupted. Insolvency may create a negative image for the entire travel sector as well; as a result, the sector itself has developed a variety of guarantee mechanisms. Moreover, governments in some legal systems have also intervened to guarantee compensation to consumers who are confronted with an insolvent travel company. The mechanisms in this respect are quite divergent. In addition, this phenomenon of providing security in the case of insolvency in the package travel sector has not yet been analysed from an economic perspective. Nevertheless, these mechanisms pose interesting questions from an economic viewpoint, inter alia with respect to the rationale for creating such a mechanism, but also related to the issue of whether either the sector itself or the government should organise a security mechanism. The goal of this paper is therefore to examine mechanisms geared to ensure financial compensation to consumers in instances of insolvencies in the package travel sector. A law and economics approach will be used to critically review these security mechanisms. In this ambit, the different mechanisms opted for in the UK, The Netherlands, and Sweden will be displayed and analysed.

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