Quality Assurance in Competitively Tendered Contracts

Abstract

Three contractual forms used in the competitive tendering of public transport services are compared. The conclusions are: (i) Under the full cost contract the operator must make strictly positive profit in order to maintain quality. (ii) With the net cost contract the desired level of quality can be achieved with a lower transfer to the operator, if the revenue risk is not too high. (iii) Incentive contracts with measured quality included as a variable must include risk compensation for imprecise performance measurements. It is argued that the predictions of the model explain some features of actual tendering contracts.

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