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 1136 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.
| Original language | English |
|---|---|
| Pages (from-to) | 583-591 |
| Number of pages | 9 |
| Journal | Telecommunications Policy |
| Volume | 35 |
| Issue number | 7 |
| DOIs | |
| Publication status | Published - 1 Aug 2011 |
Bibliographical note
The authors are greatly indebted this journal's reviewers, whose suggestions greatly improved this paper. In addition, David Sappington provided helpful comments and suggestions. The authors are grateful to Chunrong Ai, Simon Fan, Mark Jamison, seminar participants at University of Florida, and participants at the Southern Economics Association conference for helpful comments.Funding
Finally, they also thank the Public Utility Research Center, University of Florida, for financial and data support; however, the views expressed here do not necessarily represent those of sponsoring organizations.