Pii: S1366-5545(99)00033-2

This paper extends previous works that view transit systems as minimizing their after-subsidy costs. The paper uses the expense preference behavior model in economics and derives ®rst-order conditions for the manager. From the ®rst-order conditions, the paper formally shows that the decomposition of relative price ineciency between management behavior and subsidies found in the work of Sakano et al. (1997) can be derived from a utility maximizing model, thus placing that decomposition within the shadow price literature. Extensions to the models to calculate expense preference are also presented. The results of the estimated models show that transit systems have expense preference for capital and not labor. This expense preference behavior increases total costs by about 15% and capital subsidies by about 20%. Ó 2000 Elsevier Science Ltd. All rights reserved.