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Title: Contract Choice, Incentives, and Political Capture in the Public Sector

Author(s): Philippe Gagnepain and Marc Ivaldi

Publication Date: October 2010

Keyword(s): Contract choice, Cost reduction, Incentives and Public transit

Programme Area(s): Industrial Organization

Abstract: We consider a framework of contractual interactions between public transport authorities and transport operators. We estimate simultaneously the contract choice by the authorities and the effect of regulation on the cost-reducing activity of the operators. We test whether the current regulatory schemes are the observable items of a complex menu of contracts, as proposed by Laffont and Tirole. We suggest that the generation process of the data we have in hand is better explained by a regulatory framework where an unsophisticated regulator is politically motivated. We show how these political preferences shape the contract choice and we shed light on how operating costs are affected. On average, operators? costs are 12.1% lower under fixed-plus regimes, compared to the cost-plus cases.

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Bibliographic Reference

Gagnepain, P and Ivaldi, M. 2010. 'Contract Choice, Incentives, and Political Capture in the Public Sector '. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8053