Subways or Minibuses? Privatized Provision of Public Transit

Abstract

Workers in developing countries waste significant time commuting, and gaps in public transit constrain access to productive jobs. In many cities, privately-operated minibuses provide 50–100% of urban transit, at the cost of long wait times and poor personal safety for riders. Should developing-country cities follow the typical recommendation of bus rapid transit or subway investments or rather optimize this existing, home-grown network? I build a micro-founded model of privatized shared transit subject to externalities in matching between buses and passengers. I then estimate the model with newly collected data on minibus and passenger queues in Cape Town and stated user preferences for exogenously-varied commute attributes. I find that Cape Town’s existing bus rapid transit decreased welfare, net of costs, but socially-optimal minibus fares and commuter taxes correct matching externalities, particularly benefit low-skill workers, and reduce spatial misallocation. Government actions to improve security bring even more substantial welfare gains.