Contract renewal as an incentive device: An application to the French urban transport sector

In the French urban public transport industry, operations are often delegated and periodically putted out forto tender. Thus, operators’ incentives to reduce costs come from both profit maximization during the current contract and from the perspective of contract renewal. We have constructed a dynamic incentive regulation model that captures these features and we show that both the level of cost-reducing effort and its repartition during the contracting period depend on the contract type (cost-plus, gross cost or net cost contract). We then estimated a cost frontier model for an eight-year panel of French bus companies (677 company-year observations) to test our predictions.