Universal Service Subsidies and Cost Overstatement: Evidence from the U.S. Telecommunications Sector

Telecommunications Policy, Vol. 35, No. 7, pp. 583-591

24 Pages Posted: 26 Nov 2010 Last revised: 20 Aug 2011

See all articles by Sanford V. Berg

Sanford V. Berg

University of Florida - Department of Economics

Liangliang Jiang

Hong Kong Polytechnic University

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Date Written: August 2011

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 1,136 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.

Keywords: Telecommunications, High Cost Subsidies, Universal Service

JEL Classification: L96, H54, L51

Suggested Citation

Berg, Sanford V. and Jiang, Liangliang and Lin, Chen, Universal Service Subsidies and Cost Overstatement: Evidence from the U.S. Telecommunications Sector (August 2011). Telecommunications Policy, Vol. 35, No. 7, pp. 583-591. Available at SSRN: https://ssrn.com/abstract=1715064

Sanford V. Berg (Contact Author)

University of Florida - Department of Economics ( email )

Gainesville, FL 32611-7140
United States
352-392-0132 (Phone)
352-392-7796 (Fax)

HOME PAGE: http://www.cba.ufl.edu/purc/facultyinfo.asp?WEBID=1260

Liangliang Jiang

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

Chen Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

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