Politics and Regulation: The Case of Public Transit

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Empirical Micro Seminar
University of Pennsylvania

3718 Locust Walk
309 McNeil

Philadelphia, PA

United States

Political economy has long acknowledged the role played by politics in policy decisions. The purpose of this paper is to analyze the impact of politics on regulatory contracts in public transportation. Public transportation is regulated at the municipality level and hence could be influenced by the political composition of the City

Council. Data from bus transit contracts in 57 French cities from 1985 to 1993 show that the price charged to consumers is significantly different between left-wing and

right-wing cities, the former being lower. The election held in 1989 has shown the emergence of a new party acting as an interest group with environmental interests. Its influence has been significant irrespective of a leftist or rightist majority. While adopting an incentive regulation framework, we develop a model to take into account such political factors by considering a nonbenevolent regulator. Relying on a structural model, we estimate the parameters of the demand and cost functions as well as the shadow cost of public funds, the density of firms’ types and the weight

associated to the consumer surplus for every city as a function of political factors and cities financial situation. The empirical results show that cities with a leftist majority and with environmentalists in their council tend to put a larger weight on the consumer surplus leading them to lower the price for public transportation.

As expected, the level of debt per capita restrains the cities in their redistributive policies.

For more information, contact Jere Behrman.

Isabelle Perrigne

Penn State

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