["Journal of Economics &Management Strategy, EarlyView. ", "\nABSTRACT\nPolicies that target a single aspect of agents' motivation may lead to their diminished efforts in other areas. This paper examines the effect of the European Union's flight delay compensation policy on flight on‐time performance by exploiting a unique policy variation in a difference‐in‐differences framework. The policy requires airlines to offer cash compensation to passengers for delays lasting more than 3 h. I find that, while the policy decreases the proportion of delays exceeding 180 min by 0.3 percentage points (20 percent), it also reduces the proportion of delays less than 15 min by 3.6 percentage points (5 percent). This effect spillovers to routes without the policy variation. Evidence suggests that the results are related to airlines' delay management practices. I also show that the results hold under a variety of robustness checks, and alternative explanations are ruled out. This paper provides insights into airlines' strategic responses to regulatory incentives and informs the design of related transportation policies and quality regulation.\n"]