Incentive Regulatory Policies: The Case of Public Transit Systems in France

Abstract

This paper is aimed at assessing the empirical relevance of the new theory of regulation. It relies on a principal-agent framework for studying the regulatory schemes used in the French urban transport industry. Taking the current regulatory schemes as given, the model of supply and demand provides estimates for the firms' inefficiency, the effort of managers, and the cost of public funds. It allows deriving the first-best and second-best regulatory policies for each network and comparing them with the actual situation in terms of welfare loss or gain. Fixed-price policies are lying between fully informed and uninformed second best schemes. Cost-plus contracts are dominated by any type of second-best contract. From these results, we may conjecture that fixed prices contracts call for better informed regulators.

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