Yardsticks on the road: Regulatory contracts and cost efficiency in the Norwegian bus industry

In this paper a cost frontier model is estimated for an eleven-year panel of Norwegian bus companies (1136 company-year observations) using the methodology proposed by Battese and Coelli (1995). The main objective of the paper is to investigate to what extent different type of regulatory contracts affect company performance. The panel model proposed by Battese and Coelli (1995) allow for year/company specific efficiency measures to be estimated. Thus, unobservable network or other time invariant characteristic of the operating environment can be controlled for by analyzing the dynamics of measured productivity across time for firms regulated under different types of contracts, rather than relying solely on variations across companies during one time period. Therefore, the paper offers methodological and data advantages over previous work on this subject. The main and robust result of the paper is that the adoption of a more high-powered scheme based on a yardstick type of regulation significantly reduces operating costs. The results contained in this paper thus confirms theoretical predictions regarding the incentive properties of high powered incentive schemes and in particular the dynamic benefits of yardstick competition.