Abstract

The recent reform of local public transport in Italy establishes that public subsidies should be capped in order to increase X-efficiency of an industry characterised, in the last two decades, by soft budget constraints and declining effectiveness (i.e. the share of people using private cars has increased dramatically). This new regulatory instrument, that can be called "subsidy cap", is analogous in its formulation to the best known price cap mechanism. The allocation and production efficiency properties of the subsidy cap have not been studied in the economic literature. The present paper aims at filling this gap, and at suggesting a subsidy cap mechanism based on the "menu of contracts" principle of Bayesian incentive regulation theory. The proposed mechanism, although non Bayesian, shares some desiderable properties with more information demanding optimal Bayesian mechanisms.