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
Date Written: August 2011
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: Suggested Citation