Universal service subsidies and cost overstatement : evidence from the U.S. telecommunications sector
Document Type
Journal article
Source Publication
Telecommunications Policy
Publication Date
8-1-2011
Volume
35
Issue
7
First Page
583
Last Page
591
Publisher
Pergamon Press
Abstract
Utility subsidies are often defended as promoting universal service. However, specific support formulas may be poorly targeted and/or designed. The U.S. high-cost loop support (HCLS) program (formerly referred to as the Universal Service Fund (USF)), has been a key component of the FCC's USF program. With proposed initiatives for universal access to broadband, it is useful to critically evaluate how the HCLS creates a moral hazard problem. This study finds that companies receiving HCLS subsidies have an incentive to report high costs to the FCC in order to qualify for still higher support payments. Using data from 1136 rural telecom firms in 50 states (1992-2002), this study shows that some companies respond to current incentives by overstating costs (or incurring higher costs) as they approach the subsidy cutoff points. Compared to the no-subsidy group, companies at the point of greatest subsidy jump appear to overstate costs more due to larger marginal benefits. Such perverse incentives need to be recognized in future universal service initiatives.
DOI
10.1016/j.telpol.2011.04.016
Print ISSN
03085961
E-ISSN
18793258
Publisher Statement
Copyright © 2011 Elsevier Ltd.
Access to external full text or publisher's version may require subscription.
Full-text Version
Publisher’s Version
Language
English
Recommended Citation
Berg, S. V., Jiang, L., & Lin, C. (2011). Universal service subsidies and cost overstatement: Evidence from the U.S. telecommunications sector. Telecommunications Policy, 35(7), 583-591. doi: 10.1016/j.telpol.2011.04.016