MEASURING THE IMPACT OF PRICE CAPS ON PRODUCTIVE EFFICIENCY IN TELECOMMUNICATIONS IN THE UNITED STATES

ABSTRACT

Incentive regulation is now an important regulatory tool in the telecommunications industry in the United States. The issue explored here is whether incentive regulation has resulted in an increase in productive efficiency. After providing an overview of the nature of incentive regulation, the methodology for measuring the effects of incentive regulation on productive efficiency is reviewed. This methodology is data envelopment analysis and allows for the measurement of both scale efficiency and technical efficiency of individual local exchange carriers. The results indicate that most local exchange carriers (LEC) were technically efficient over the 1988–1998 period. Four LECs, however, consistently demonstrate scale inefficiency. Finally, in the aggregate, there is no identifiable improvement in aggregate LECs' technical efficiency between 1988 and 1998.