Title

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

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.

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Full-text Version

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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