LAUSR

Abstract This study explores the principal-agent problem as part of a broader discussion of the challenges of privatising and outsourcing of public utilities. The research asks: how can a public transport authority (the principal) motivate bus operators (agents) to achieve the authority's goals (more and better public transport) when their respective interests may not align? The case study is based on the UK “Quality Contract Scheme”, an option that has never been used before, thus providing an opportunity to understand the challenges in such cooperative schemes, and explore how public authorities struggle to achieve their goals via private service providers. Our findings reveal that the actors could not align their incentives due to transaction costs and information asymmetry, which ultimately damaged the quality of the financial projections and thwarted approval of the scheme.