China’s rapid urbanization process has led to great increase of travel need in urban area, in order to meet those travel needs and ease traffic congestions, local governments use subsidy policy to offer incentives to increase service supply and improve the service levels. The use of subsidy has been widely discussed since the slowdown of the economy and fiscal revenue. This paper discusses the challenges of the development of urban bus in China, responsibilities of governments and bus operators and then proposes an incentive subsidy mechanism which considered operation cost, performance and passenger satisfaction. The mechanism is supposed to balance fiscal affordability and service supply, it overcomes the information asymmetry between bus operators and the local government in the subsidy process. Policy recommendations are offered and possible directions for further research are explored.

CICTP