Regulatory contracts and cost efficiency in the Norwegian Bus Industry: Do high-powered contracts
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- Discussion Papers 
In this paper we investigate the effects of different regulatory contracts on operational cost performance for Norwegian urban transport companies. Exploiting the panel nature of our data (11 years and 1136 company-year observations), we propose a method to estimate regional time varying inefficiency measures that overcomes some of the shortcomings of existing approaches. In particular, the proposed method does not restrict the time pattern of the inefficiency measure (as in Liu (1993)) and, unlike the method proposed by Coelli and Battese (1995) is robust to potential correlation between a firm’s inefficiency and input use (right hand side variables). In addition, unlike previous studies on the impact of regulatory contracts on performance, in this paper the potential endogeneity of the regulatory contract is addressed. The main result of this paper is that the contract type does not seem to affect efficiency across counties. This contradicts previous research on this subject. The interpretation of this negative result is an open question. Perhaps in practice, due to the bargaining power of firms, the power of the yardstick and subsidy-cap type of contracts is lower than one would expect from the formal analysis of the regulations. However, this negative result may explain why the authorities have been constantly searching for new regulatory instruments during the last decade. This paper also shows that a careful empirical analysis is required in order to infer the effects of contract types on firm performance, otherwise the results may be quite misleading.