Innovation is starting to play an important role in the provision of urban public bus transport. This paper analyses the implications of different contractual interactions, on both technological (i.e., vehicles and infrastructure) and service operation innovation, in private and public procurement of urban bus services in Santiago, Chile. Our findings indicate that the contractual framework firmly determines the degree of innovation present in the industry. In particular, limited regulation incentivises strong service operation innovation, while showing negative vehicle innovation. On the other hand, gross cost and fixed payment contracts lead to negative service operation innovation by operators, motivated mainly by cost reduction efforts.