Telecommunications in the United States and Changing Productive Efficiency

The issue explored is whether incentive regulation in the telecommunications industry in the United States 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. An approach is introduced that not only provides a measure of the change in productivity but also allows for a decomposition into two mutually exclusive and exhaustive components—changes in technical efficiency over time and shifts in technology over time. Using annual data on four output measures and six input measures for the period 1988–1999 for nineteen individual local exchange carriers, the results indicate that productivity increased by about 4.9% per year. This growth is due primarily to innovation rather than improvements in efficiency. Of the 19 LECs in the sample, 12 were operating efficiently throughout the entire 1988–1999 period. Of the remaining seven, three showed a slight improvement in efficiency while the efficiency of four declined. In the aggregate, however, there was virtually no change in efficiency.