Private Competition for the Provision of a Government Benefit: Evidence from the Federal Lifeline Program

Abstract

The federal Lifeline program, which subsidizes phone service for low-income households with the goal of achieving universal service, expanded in 2008 to allow entry of competing low-cost wireless providers. The expansion spurred huge growth in program enrollment and spending, driven primarily by providers offering free monthly service. This paper studies the interaction of competition and oversight for these new wireless providers. In particular, this research suggests a level of regulation that achieves gains from competition but limits over-enrollment and entry by potentially inefficient providers.

There is large state-level variation in how Lifeline is administered, as each state has the authority to approve or deny entry by service providers within their state. In general, the regulator wants the enrollment- and quality-enhancing benefits of competition and the lower administrative costs of privatization. However, loose oversight leads to the entry of less productive firms, who are only profitable under lax regulation. What is useful here is that regulatory environments vary widely between states, from those with essentially free entry to others that admit no low-cost wireless providers. Using these sources of variation, I address the effects of competition and regulation with cross-state comparisons of outcomes.

The data on enrollment come from publicly available subsidy claims from the Universal Service Administrative Company. These provide monthly enrollment figures for individual firms by state. Since the data span though the implementation of the 2012 Lifeline Reform Order, they also reveal the percentage of subscribers each firm is able to verify as eligible. The portion of subscribers that can be verified varies greatly across both firms and states.

Based on the trends in the data, I estimate a model in which firms vary in their ability to enroll eligible consumers and their compliance with regulatory rules, and states vary in their level of oversight. Given this information, firms decide which states to enter. The states that a firm can profitably enter as a Lifeline provider will be dictated by a combination of competition and regulatory oversight. Utilizing data on firm-by-state-level enrollments that spans the pre- and post-reform periods, this paper can jointly assess the effects of competition and oversight on enrollment, compliance, and entry decisions.

From preliminary results, I find that the benefits and costs of competition in the wireless segment of the Lifeline market depend on the identities or types of firms in a given market. Cases where large fractions of subscribers are unable to be verified as eligible are concentrated amongst a small number of firms, which operate only in states with fairly lenient oversight. Additionally, compliance behavior varies much more across firms than it does within-firm, across states. From the regulator's standpoint, the largest costs of loose oversight come not from firms adjusting their behavior, but from the selection effect on which firms enter the market.

Keywords: Universal Service, Competition, Regulation, Oversight