An incentive mechanism design for bus subsidy based on the route service level

The use of public transit subsidy has become a widely discussed aspect for the development of public transportation. The government uses the subsidy policy to offer incentives to improve the service levels and convenience of residents. This paper presents an incentive subsidy mechanism which is based on the service level of a bus line. The subsidy mechanism overcomes the problem of information asymmetry between public transport companies and the local government in the subsidy process, and thus reinforces that bus companies should provide efficient services on lines of different profitability levels. This paper provides the analytical results of the model and analyzes the optimal results. To broaden the scope of application of this model, this study also provides an example that explains how to regulate the bus company when quality reduction happened if the subsidy occurs at the beginning of the subsidy period. At last, management significance and policy recommendations are offered and possible directions for further research are explored.