'Unhappy Contracts': The Structure and Effect of Telecommunication Interconnection Agreements

Abstract:     
While most contracts are made between two parties in search of profit and without substantial government scrutiny, some are not so happy. This project examines one such species, the interconnection agreement entered into under the 1996 Telecommunications Act. After discussing the history and requirements of the statute, the paper hypothesizes that instead of the more typical profit maximization motive, the dominant party, in this case the incumbent local service provider, might seek to minimize losses. As in other cases where there is substantial uncertainty, parties to interconnection agreements might also be expected to cluster payment terms around some common patterns, or focal points.

The empirical section of the paper investigates these hypotheses through the complete set of 140 contracts entered into in Michigan between various phone companies entering the local phone market, called CLECs, and one local incumbent provider, SBC. Not only does the paper look at what determines various contract terms, but also it examines through Michigan Public Service Commission minutes, litigated cases and contract amendments what characteristics predict whether the parties can successfully adjust over time or whether they continue to experience conflict.

Keywords: contracts, telecommunications, bargaining, empirical, relational contracts

JEL Classifications: B41, C21, C25, K12, K23, L96

Working Paper Series