Public transit cost efficiency studies: The impact of non-contracting regulations

This paper studies the effects of non-contracting regulations on the efficiency of U.S. public transit systems. First, it estimates a system of cost and input demand equations and second, a frontier equation with technical inefficiency a function of regulation and heterogeneity variables. It finds that bus useful-life regulation makes transit systems overuse capital relative to labor, contracting out entire service is 7.2% cheaper than direct operation, and a mixed operation that combines direct operations with contracting-out has no statistically significant effect on cost. Also, according to the study’s results, the U.S. labor protection regulation (Section 13c) and contracting out entire service make transit systems overuse capital and non-labor inputs relative to labor respectively. Overall the study finds that the regulations increase technical change by a small amount and make transit systems perceive their costs as low, which in turn makes them produce more output. Other findings are, the average transit system is 73% technically efficient, 68% allocative efficient and 50% cost efficient. Finally, incentive regulation increases technical inefficiency, bus useful-life regulation reduces technical inefficiency, and transit systems that contract-out their entire services have high levels of technical inefficiency.