Compliance and competition with heterogeneous service providers: the federal Lifeline program

This paper studies how compliance behavior varies across competing service providers in the Lifeline phone subsidy program and assesses whether enlarging the set of providers improves program outcomes. In markets where firms compete to provide government benefits or services directly to individuals, the most productive firms—in terms of service quality or operating costs—survive and serve the market. However, imperfect enforcement of program rules may weaken competitive pressures through non-compliance, allowing less productive firms to maintain market share. I exploit institutional features of the Lifeline program, state-level variation in regulatory environments and a one-time reform, to empirically document the importance of provider heterogeneity following a 2008 expansion of Lifeline. The presence of low-compliance providers in particular markets drives the largest state-level differences in wasteful or inefficient program spending. Qualitatively, these providers appear to select into state markets with looser enforcement of program rules. In counterfactual simulations, excluding low-compliance providers prevents 500,000 ineligible enrollments, while only reducing eligible enrollments by 100,000. Further restrictions come at a higher cost, reflecting the trade-off of compliance and competition.