Informal and Privatized Transit: Incentives, Efficiency and Coordination

Abstract

Informal and privatized transit services, such as minibuses and shared auto-rickshaws, are integral to daily travel in large urban metropolises, providing affordable commutes where formal public transport is inadequate and other options are unaffordable. A defining feature of these systems is their decentralized organization, with drivers providing service in response to rider demand and earning opportunities. While this structure helps fill critical mobility gaps, it can also generate inefficient service patterns when profit-driven driver route choices do not align with system-wide mobility goals. We develop an analytically tractable game-theoretic framework to study incentives underlying informal and privatized transit systems with a fixed menu of routes, quantify efficiency losses from decentralized driver route choice, and design incentive mechanisms to mitigate these inefficiencies. Here, profit-maximizing informal operators (drivers) decide where to provide service and cost-minimizing commuters (riders) decide whether to use these services. Within this framework, we establish tight price of anarchy bounds showing that decentralized, profit-maximizing driver behavior can lead to bounded yet substantial losses in cumulative driver profit and rider demand served and that these losses can be mitigated through targeted interventions: budget-balanced cross-subsidization, which uses route-specific tolls/subsidies to shape driver payoffs, and fare optimization, which changes rider demand and driver margins through centrally regulated route-level fares. Finally, numerical experiments based on a real-world informal transit system in Nalasopara, India, reinforce these findings.