Estimating the Welfare Effects of Digital Infrastructure

56 Pages Posted: 5 Feb 1997 Last revised: 17 Oct 2000

See all articles by Shane M. Greenstein

Shane M. Greenstein

Harvard University - Technology & Operations Management Unit; National Bureau of Economic Research (NBER)

Pablo T. Spiller

University of California, Berkeley - Business & Public Policy Group

Date Written: September 1996

Abstract

While much economic policy presumes that more information infrastructure yields higher economic returns, little empirical work measures the magnitudes of these returns. We examine investment by local exchange telephone companies in fiber optic cable, ISDN lines and signal seven software, infrastructure which plays an essential role in bringing digital technology to local telephone networks. We estimate the elasticity of the derived demand for infrastructure investment faced by local exchange companies, controlling for factors such as local economic activity and the political disposition of state regulators. Our model postulates a regulated profit maximizing local exchange firm and a regulatory agency with predetermined political leanings in favor of consumer prices or firm profits. The model accounts for variation in state regulation and local economic conditions. In all our estimates we find that consumer demand is sensitive to investment in modern infrastructure, particularly as represented by fiber optic cable. Our estimates imply that infrastructure investment is responsible for a substantial fraction of the recent growth in consumer surplus and business revenue in local telecommunication services.

Suggested Citation

Greenstein, Shane M. and Spiller, Pablo T., Estimating the Welfare Effects of Digital Infrastructure (September 1996). NBER Working Paper No. w5770. Available at SSRN: https://ssrn.com/abstract=4617

Shane M. Greenstein (Contact Author)

Harvard University - Technology & Operations Management Unit ( email )

Boston, MA 02163
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Pablo T. Spiller

University of California, Berkeley - Business & Public Policy Group ( email )

545 Student Services Building
Berkeley, CA 94720
United States
510-642-1502 (Phone)
510-642-2826 (Fax)

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