Abstract A rural bus integrating passenger and freight transport is a new effective public transit mode to realise village interconnection and solve the first–last mile rural logistics service. Mixed services reduce logistics costs and generate additional income for transit operators. However, the mutual interpenetration of logistics and passenger services in a single bus trip may lead to a decline in the service quality of both passengers and goods. With this in mind, we designed a government subsidy incentive contract and a logistics alliance payment incentive contract respectively from the perspective of participants based on the principal-agent theory. In addition, a bi-level programming model consisting of two principals (government and logistics alliance) and one agent (transit operator) was proposed to incentivise bus operators and improve passenger and freight service quality. It scientifically realises the coordination of interests between the principals and agents. A Chinese case study was conducted to examine the proposed models and methods, and a passenger-based incentive subsidy programme from the government was proposed to replace the mileage-based one. With both incentive policies (government and logistics alliance), passenger travel time can be reduced by 4.2 min, and logistics transportation time can be shortened by 30 min. In addition, the total annual government budget can be reduced by 17.2% (¥450,000, $64,000) and annual fleet mileage savings by approximately 9.4% (62,000 km) compared with the mileage-based incentive programme in the case study. A sensitivity analysis is conducted to explore the impact on the collaborative system. This innovative concept, combined with incentive schemes, is a good reference for public administration to avoid the dilemma of having passenger and freight transport in low-demand areas.