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Universal service subsidies and cost overstatement: Evidence from the U.S. telecommunications sector

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  • Berg, Sanford V.
  • Jiang, Liangliang
  • Lin, Chen

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.

Suggested Citation

  • Berg, Sanford V. & Jiang, Liangliang & Lin, Chen, 2011. "Universal service subsidies and cost overstatement: Evidence from the U.S. telecommunications sector," Telecommunications Policy, Elsevier, vol. 35(7), pages 583-591, August.
    • Handle: RePEc:eee:telpol:v:35:y:2011:i:7:p:583-591
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    Cited by:

    1. King, Jesse & Gonzales, Amy L., 2023. "The influence of digital divide frames on legislative passage and partisan sponsorship: A content analysis of digital equity legislation in the U.S. from 1990 to 2020," Telecommunications Policy, Elsevier, vol. 47(7).
    2. Xia, Jun, 2016. "Universal service policy in China (I): Institutional elements and ecosystem," Telecommunications Policy, Elsevier, vol. 40(2), pages 242-252.
    3. Antonio Estache, 2014. "Infrastructure and Corruption: a Brief Survey," Working Papers ECARES ECARES 2014-37, ULB -- Universite Libre de Bruxelles.
    4. Holt, Lynne & Galligan, Mary, 2013. "Mapping the field: Retrospective of the federal universal service programs," Telecommunications Policy, Elsevier, vol. 37(9), pages 773-793.

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