Contract Renewal as an Incentive Device. An Application to the French Urban Public Transport Sector

Abstract

In the French urban public transport industry, operations are often delegated and periodicallyput out for tender. Thus, operators incentives to reduce costs come from both profitmaximization during the current contract and from the perspective of contract renewal. Weconstruct a dynamic incentive regulation model that captures these features and we show thatboth the level of cost-reducing effort and its repartition during the contracting period dependon the contract type (cost-plus, gross cost or net cost contract). We then estimate a costfrontier model for an eight-year panel of French bus companies (664 company-yearobservations) to test our predictions.