Abstract: The aim of this research is to amend the current contracting system to improve the quality of inter-urban bus services in metropolitan areas and thereby increase demand and reduce externalities. A methodology is proposed for tendering transport contracts which is applied in the Spanish region of Castilla and León. Based on a previous demand model, new incentives are proposed to encourage the operating companies to make improvements in the quality of service they provide on their metropolitan bus routes. The main contribution made by this research with respect to other similar methodologies is found in the incorporation of the subjective value of time and willingness to pay in exchange for improvements in service quality. This information is used to determine the optimal formula for public subsidies. The results show that, without any increase in costs for the administration, the amount of the subsidy due for underuse of the service could be reduced by increasing demand through providing a more attractive public transport service. It has also been shown that improvements in quality could be profitable, not only for society at large but also for the operating companies themselves.

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