CRTP-16

"Regulation and Productive Efficiency: Evidence from the U.S. Telecommunications Industry"

Sumit K. Majumdar
June 1995

This paper investigates the impact of incentive regulation schemes on the efficiency of 
local operating companies in the U.S. telecommunications industry. Efficiency is measured 
for the period 1988 and 1993 and it is found that the introduction of pure price cap 
schemes has a strong and positive, but lagged, impact on the technical efficiency of 
local exchange carriers. Where price cap schemes operate in conjunction with an earnings 
sharing scheme, there is a positive and more immediate impact on technical efficiency, 
but the impact is not as strong when compared to the impact of a pure incentive regulation 
scheme alone. Where only an earnings sharing scheme is in operation, its impact over time 
is found to be detrimental to technical efficiency, and weaker though broadly positive 
results are obtained with respect to the impact of incentive regulation on scale 
efficiency of U.S. local exchange carriers.