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

In the French urban public transport industry, services are often delegated to a private firmby the mean of a fixed-term regulatory contract. This contract specifies the duties of thefirm and a financial compensation. When it expires, a new contract is awarded, possibly toa different operator. Cost-plus and fixed-price (gross cost or net cost) contracts arecommonly used to regulate the operators in the transport industry. In this paper, weanalyse the incentives for the operator to reduce its cost. These incentives come from boththe 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 timeremaining till contract expiration. We use a sample of 124 French urban public transportnetworks covering the period 1995-2002 to test our predictions. Our proxy for the costreducing effort is technical efficiency. The data largely confirm the importance of contracttype on performances and the incentive effect of contract renewal....