Efficient contracting and incentive agreements between regulators and bus operators: The influence of risk preferences of contracting agents on contract choice

• Identifying risk preferences of bus contracting agents in contract choice.
• Designing efficient contracts with bonus and penalty payments.
• Develop choice experiment to account for endogeneity in studying contract choices.
• Establish preferences for performance-based contracts of bus operators in Australia Provide a powerful tool to assist regulators in gauging likely preference responses of operators/bidders.

Contracts that govern transactions between regulators and operators are an important feature of service delivery in public transport. This paper reviews the literature on efficient contracting in general and its application to public transport contracts and found little empirical evidence on the influence of risk preferences of contracting agents on contract choice, a fundamental premise of classical contracting theory. Departing from the existing literature, this paper develops a choice experiment to study public transport operators’ preferences for different contractual forms. People involved in the public transport industry across Australia are invited to do the survey but the respondents are mainly bus operators in New South Wales. The respondents are offered two hypothetical contracts with different risk profiles and incentives and asked to indicate their preferences as well as their acceptance to provide the services under the contract they prefer. A non-linear scaled multinomial logit model is estimated to establish the role of risk allocation on contract preference of bus operators and the optimal amount of risks and incentives, conditioned on the operators’ attitude towards risk. The results help authorities design performance-based contracts to obtain their objectives while maintaining the operators’ level of satisfaction.