Economic efficiency and political capture in public service contracts

We consider contrac ts f or public transport services between a p ublicauthority and a transport operator. We b ui ld a struct ural endo gen ousswitching model w her e the contract choice re su lts from the combinedef fect s of the incentiviza tion scheme aimed a t monitoring the opera tor?sef fic iency and the politi cal agenda followed by the r egulator to accountfor the v oice of pri vate inter ests. Our resu lts support theoreticalpr ediction s a s they suggest tha t cost-plus contracts entail a higher costfor society than fix ed-price contracts b ut allo w the public authority toleave a rent to a subset of ind i viduals. Accountin g f o r transfers tointer est groups in welfar e computations reduces the welfar e ga p betweencost-plus and fix ed-price regimes