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Designing ridership incentives

New research report from K2 on the impact of different level of ridership incentives contained in public transport contracts in Sweden.

The objective of this study is to analyse the impact of different level of ridership incentives contained in public transport contracts in Sweden. There is evidence to suggest that, thus far, the inclusion of such ridership incentives in various types of contracts has had little or no effect. This raises the question of why incentives have proved ineffective and whether it is possible to estimate welfare-optimal incentive schemes. The study is based on a non-linear optimisation model with various constraints on the level of freedom within the contract. Five contracts in the Stockholm and Skåne regions are analysed.

These analyses show that output-based funding in the form of subsidies per passenger can produce significant economic benefits and increased patronage with the same level of public funding.

Public transport supply without subsidies can be profitable; however, if the operators are free to design the service, it will inevitably lead to higher fares, reduced service levels and larger buses. Therefore, a failure to subsidise public transport will result in a loss of welfare.

In order to achieve increased patronage through ridership incentives, the operator must have the necessary level of freedom to change the service level. If the operator cannot change fares or reallocate the supply, there will be no change in the allocation of resources or the number of passengers unless external shocks affect patronage.

A central result from this study is that ridership incentives must be significantly increased from current levels if they are to have an impact on patronage and take account of the welfare benefit to existing passengers. Without a basic subsidy, and given that the public authority retains ticket revenue, ridership incentives must be 220-300 percent of current ticket revenue in order to induce the operator to deliver a welfare-optimal level of service.

Calendar from K2