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

Axel GAUTIER (HEC-ULg and CORE, Université Catholique de Louvain) & Anne YVRANDE-BILLON (CES, Université Paris 1 Sorbonne)

In the French urban public transport industry, services are often delegated to a private firm by the mean of a fixed-term regulatory contract.  This contract specifies the duties of the firm and a financial compensation.  When it expires, a new contract is awarded, possibly to a different operator.  There are three types of commonly used contracts: cost-plus, gross cost and net cost contracts.   In this paper, we analyse the incentives for the operator to reduce its cost.  These incentives come from both the profit maximization during the current contract and the perspective of contract renewal.  In our model, the amount of cost-reducing effort depends on the contract type and the time remaining till contract expiration.  We use a sample of 124 French urban public transport networks covering the period 1995-2002 to test our predictions.  Our proxy for the cost reducing effort is technical efficiency.   The data largely confirm the importance of contract type on performances and the incentive effect of contract renewal. 

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