Operating subsidies and performance in public transit: an empirical study

Based upon several studies analyzing the effects of public transit subsidies on a system's performance, there is a consensus that public transit subsidies have increased a system's effectiveness but compromized its efficiency and overall performance. In addition to providing an extensive review of recent work on this topic, the present analysis extends prior empirical research in two significant directions. First, this study controls for cross-section heterogeneity and autocorrelation that may otherwise seriously bias the resulting estimates and invalidate statistical tests. Second, in addition to examining the effect of subsidy by source (local, state, and federal), the paper statistically tests for differential subsidy effects by system size, a topic on which the literature has been surprisingly quiet. Based upon an analysis of panel data for fixed route public transit systems in Indiana, subsidies have no general effect on transit performance. Rather, transit system size significantly influences the effect that subsidies, both in total and disaggregated by source, have on performance. Further, a simulation analysis indicates that redistributing subsidies with no change in the total subsidy level will have little impact upon transit performance, a finding which may have important implications for evaluating alternative allocation schemes.