The Economics and Politics of Contracting out with the Private Sector: Evidence from the US Transit Industry

The paper studies contracting practices in the US transit industry. It employs the methodsof transaction cost economics and public choice theory to develop an empirical model of buscontracting in the US transit industry. The empirical results shed light on why transit services inthe US remain largely public, despite many attempts to introduce competition by contracting outservices to the private sector. The results show that the decision by transit agencies to contract outwith the private sector is constrained by the transaction costs of contracting and the institutionaland subsidy arrangements that govern the transit industry in the US. Services that requireidiosyncratic investments to provide large densities of passengers are less likely to be contractedout than those services that are provided using standard, small vehicles. Similarly, increases infederal subsidies and dedicated subsidies are found to discourage contracting out with the privatesector. On the other hand, increases in state and local subsidies, other things being equal,encourage contracting. Agencies that have high labor costs –– indicating strong labor unions ––are less likely to contract out. In light of these findings, the paper concludes that piecemealcontracting out of services is not likely to increase the role of the private sector in the provision ofpublic transit services. Structures of subsidies and federal arrangements creates intertwinedincentives that discourage contracting by transit agencies, thus foiling the attempts to increaseefficiencies by establishing competition for transit markets.