The Journal of Productivity Analysis, 3, 67-84 (1992) 0 1992 Kluwer Academic Publishers, Boston. Manufactured in the Netherlands. The Relative Efficiency of Public versus Private Municipal Bus Firms: An Application of Data Envelopment Analysis KUO-PING CHANG AND PEI-HUA KAO Department of Economics, National Tsing Hua University, Kuang Fu Rd., Hsinchu 300, Taiwan, R.O.C. Abstract This article has employed the data envelopment analysis method to evaluate the efficiency of the five bus firms in Taipei city. When vehicle kilometers (revenue or the measure combining vehicle kilometers, revenue and the number of traffic trips on routes) was used as the output measure, it concluded that the publicly owned Taipei Municipal Bus had increased (not increased) its technical efficiency after the government liberalized the urban bus market. This article also found that in both the one output (vehicle kilometers) and three outputs cases, Taipei Municipal Bus had, on an average, lower efficiency scores than the private firms, and that while each firm usually employed a linear production technology for several, consecutive years the private firms were more flexible in adopting different technologies. 1. Introduction The issue of the relative efficiency of public and private firms has been extensively discussed by economists. The property rights literature, most commonly associated with the names of Alchian, Becker, and Demetz, suggests that because public ownership attenuates prop- erty rights, public enterprises perform less efficiently than private enterprises. However, “the existing empirical evidence actually provides weak support for this hypothesis” (Board- man and Vining [1989], p. l).’ In our opinion, whether public firms are less efficient or not is an empirical question. The literature of property rights has pointed out the costs of public ownership: Ownership is diffused among all members of society, and no member has the right to sell his share; hence, there is little economic incentive for any owner to monitor the behavior of the firm’s management. But if the public firms have good incen- tive schemes (pecuniary or non-pecuniary), owners’ monitoring will not be so important, and there is no reason to believe that these firms must perform poorly? In this article, the case study of the Taipei bus system addresses this issue: There are five intra city bus firms competing in Taipei city? The Taipei Municipal Bus (TB) is publicly owned, while Hsin-Hsin (HH), Ta-Yao (TY), Ta-Nan (TN) and Kuang-Hua (KH) are pri- vately owned. Until 1969, TB enjoyed a monopoly position in Taipei city. The four private firms became competitors in 1969 only when the government liberalized the market? The time series data of 1956-1988 of TB and the time series data of 1970-1988 of TB and the four private firms are employed to answer the following two questions. First, has the publicly owned TB increased its efficiency after the government liberalized the market? Second, 63