Misguided quality incentives: The case of the Santiago bus system

This article helps explain why incentive-based contracts have failed in some cities. It also explicitly shows how contracted kilometer- and passenger-based payments affect transit service quality. First, we study how contract renegotiations in 2012 and 2013 affected quality related to service kilometers in the bus public transport system of Santiago, Chile. To do that, we analyze the evolution of compliance measures and estimate the effect of renegotiations on key performance indicators. The main results are that the renegotiation of 2012 led to minor improvements in frequency compliance but deterioration in regularity, whereas the renegotiation of 2013 led to reduced fines for non-compliance with no change in frequency compliance and decreased regularity. Second, we formulate a model to analyze the behavior of a firm operating under a contract like the one in Santiago. We identify conditions that must be present for an operator to provide the contracted service kilometers, depending on the per-kilometer and per-passenger payments stipulated in the contract. The results of the analysis are empirically tested, and we conclude that the incentives in Santiago do not sufficiently incentivize contract compliance. A central result is a formula for payment per kilometer and payment per passenger when the objective is the provision of service kilometers