Regulations and Technology Diffusion: Cross Subsidies and Digital Infrastructure Creation

Using contemporary historical data, the analysis has examined the impact of cross‐subsidization on technology diffusion within telecommunications networks for local exchange sector telecommunications firms in the United States for the years 1995 to 2000. Firms obtaining greater cross‐subsidies engage in greater technology diffusion via network modernization using digital technologies. Contingent on the institutional setting, cross subsidies have risen. These amounts have been put to relevant use in the diffusion of technology via deployment of digital infrastructure. The principles of subsidization are considered negatively as they have presumed anti‐competitive consequences. In technology diffusion they have played a positive role, as the evidence shows. From a radical subjectivist perspective, cross subsidies generate financial capital for firms, which permits them to deploy high quality technology investments such as broadband and these investments can be used for entrepreneurial experiments in providing several customer services.     

CROSS SUBSIDIZATION AND TELECOMMUNICATIONS SECTOR WAGES

ABSTRACT 1 : This study has examined wage determination in the presence of cross‐subsidization of firms in the telecommunications industry. How variations in cross subsidies received, via the separations mechanism used in the industry, influence some firms to pay a greater level of wages is assessed. The firms studied have been almost the entire population of local exchange carriers in the US telecommunications industry between 1995 and 2000. The analysis has established that firms which are able to obtain greater cross‐subsidies, on average, in fact pay higher wages and the elasticity of the relationship is quite high. The study is the first of its kind assessing the relationship between an important regulatory variable that measures a ubiquitous process, such as cross subsidization, and the impact on employee wages.     

Frontiers of Climate Change Economics

The potential of taxes to correct environmental externalities has long been recognized among economists. Yet, this welfare-enhancing policy commonly faces strong opposition by citizens. Conversely, externality-correcting subsidies frequently enjoy high public support. We conduct a lab experiment to explore public support for Pigouvian taxes and subsidies. In an experimental market with a negative externality, participants vote on the introduction of Pigouvian taxes and subsidies under full or reduced information concerning how the tax revenues will be spent and the subsidy paid for. Theoretically the two instruments should produce identical outcomes. However, we find substantially greater support for subsidies than for taxes. This can partially be explained by the participants’ expectation that the subsidy will increase their own payoffs more than a tax, but not because it is expected to be more effective in changing behavior. Furthermore, we find that with greater uncertainty, the preference for subsidies is even stronger, a result which is consistent with loss aversion.     

Economics of compatibility standards and competition in telecommunication networks

The pro- and anti-competitive implications of technical compatibility standards are introduced in general terms and then applied to current issues in telecommunications policy. The demand and supply for standards under regulated monopoly and the transition to deregulation and competitive entry create a tradeoff between the traditional goal of achieving positive externalities from interconnection and the alternative goal of providing enhanced service offerings that may involve sacrificing universal connectivity. We argue that this tradeoff has affected the utilization of data communication networks in the U.S. and Europe. In addition, we identify problems of competing interests that complicate the European approach to standards “harmonization” in the case of telecommunications. We conclude by noting that the nature of standards and standard-setting process can have marked effects on the incentives to conduct private research and development.     

Policy issues in the development of telecommunications

The paper examines the specific features of the telecommunications system which determine its character, and the regulatory issues which arise out of a situation of potential conflict between the telecommunications network operators (PITs) and the providers and consumers of value added services transacted on the network. It looks at the policy options available to reconcile such conflicts, and at how EC policies are shaping the future of the European telecommunications ststem. It concludes that current development in telematics are aimed mainly at business users, and that safeguards for the private custormer will be necessary in order to ensure the provision of a socially equitable service.     

Policy issues in the development of telecommunications

The paper examines the specific features of the telecommunications system which determine its character, and the regulatory issues which arise out of a situation of potential conflict between the telecommunications network operators (PITs) and the providers and consumers of value added services transacted on the network. It looks at the policy options available to reconcile such conflicts, and at how EC policies are shaping the future of the European telecommunications ststem. It concludes that current development in telematics are aimed mainly at business users, and that safeguards for the private custormer will be necessary in order to ensure the provision of a socially equitable service.     

Environmental Protection for Sale: Strategic Green Industrial Policy and Climate Finance

Industrial policy has long been criticized as subject to protectionist interests; accordingly, subsidies to domestic producers face disciplines under World Trade Organization agreements, without exceptions for environmental purposes. Now green industrial policy is gaining popularity as governments search for low-carbon solutions that also provide jobs at home. The strategic trade literature has largely ignored the issue of market failures related to green goods. I consider the market for a new environmental good (like low-carbon technology) whose downstream consumption provides external benefits (like reduced emissions). Governments may have some preference for supporting domestic production, such as by interest-group lobbying, introducing a political distortion in their objective function. I examine the national incentives and global rationales for offering production (upstream) and deployment (downstream) subsidies in producer countries, allowing that some of the downstream market may lie in nonregulating third-party countries. Restraints on upstream subsidies erode global welfare when environmental externalities are large enough relative to political distortions. Climate finance is an effective alternative if political distortions are large and governments do not undervalue carbon costs. Numerical simulations of the case of renewable energy indicate that a modest social cost of carbon can imply benefits from allowing upstream subsidies.     

Perseverance of perverse subsidies and their impact on trade and environment

Theoretical and empirical aspects of policy failures due to subsidies are discussed in the context of international trade. A general classification of subsidies that cause environmental externalities is presented. The economic and environmental impacts of producer subsidies on international trade are examined with partial equilibrium analysis. The magnitude and economic and environmental relevance of subsidies in various sectors is assessed on the basis of empirical indicators. Finally, suggestions are provided on how subsidy-related policy failures can be eliminated at national and international levels.     

The Cost Structure of Australian Telecommunications

Since 1991 Australian telecommunications has undergone substantial reform. To a large extent, the economic correctness of pro-competitive policy depends on the non-existence of natural monopoly technology. This paper provides estimates of the Australian telecommunications system cost structure, and tests for subadditivity from 1943 to 1991. Additivity of the cost function after 1945 rejects the natural monopoly hypothesis and supports recent government policy. Diminished natural monopoly characteristics suggest that co-ordination between firms through networking can achieve similar economies as internal co-ordination within a monopoly. This finding is important, given the trend towards network unbundling, and service provision through interconnection.     

A model of principal-agency control of wastes under technological progress

We analyze performance and outcome of principal-agency relationships in an environment with pollution externalities and technological progress. We assume that firms may not purposely violate the pollution control regulations but nonetheless generate some pollution due to negligence. The models allow firms two possible actions: either to increase the level of treated waste legally or pay an expected penalty if illegal pollution is detected. We show that in a world with pollution externalities, technological progress does not guarantee increases in the welfare level. Most important for policy purposes, the analysis shows the trade-offs between the policy instruments: penalties, taxes/subsidies and treatment costs in a world where technological progress occurs and firms may violate the law.     

Firm location decisions,regional grants and agglomeration externalities

We examine whether discretionary government grants influence where domestic and multinational firms locate new plants, and how the presence of agglomeration externalities interacts with these policy instruments. We find that a region's existing industrial structure has an effect on the location of new entrants. Grants do have a small effect in attracting plants to specific geographic areas, but importantly, we find that firms are less responsive to government subsidies in areas where there are fewer existing plants in their industry. This suggests that these subsidies are less effective in influencing firms' location decisions in the face of countervailing co-location benefits.     

Fair,reasonable, and non-discriminatory terms and technology adoption: standard setting vs. incompatible technologies

The present paper shows that in the absence of fair, reasonable, and non-discriminatory (FRAND) licensing terms, the adoption of a standard depends on the degree of network effects. If the degree of network externalities is low, patent holders may opt for developing incompatible technologies in order to avoid the entry deterrence in the downstream market and the resulting decrease in the royalty income. If the degree of network externalities is sufficiently high, patent holders may prefer developing a common standard even though it has a negative impact on the market entry in the downstream market. Generated network externalities are then sufficiently high to create additional demand compensating the losses from the entry deterrence. The application of FRAND terms eliminates the entry deterrence problem and by consequence stimulates the standard adoption. The use of the FRAND commitment has beneficial effects for consumer surplus and total welfare.     

Optimal fiscal policy, uncertainty, and growth

This paper analyzes the macroeconomic effects of fiscal policy in a stochastic endogenous growth model. Due to externalities in human capital accumulation, the market allocation is inefficient, thereby justifying government intervention. The uncertainty stemming from technological disturbances affects the growth rate, which can be explained by precautionary motives of risk averse agents. Fiscal policy means consist of a consumption tax, investment subsidies, and bonds. We obtain counter-acting growth effects of investment subsidies, which are differentiated with respect to deterministic and stochastic capital income components. The policy implications from the deterministic model are substantially extended in the stochastic context. A general rule for a welfare maximizing policy is derived, which is represented by a continuum of alternative tax-transfer-schemes. We discuss three benchmark cases, which crucially differ with respect to their implications regarding the size of the government expenditure share.     

Consumption externalities and direct versus indirect corrective pricing

In a competitive economy with consumption externalities arising only if some commodities are put to particular uses and where individual marginal contributions to the level of the externality may differ among individuals, a first best Pareto-optimum can be attained through a set of Pigouvian taxes discriminating between users and uses of the externality-generating commodities. In the present paper we shall discuss the optimal structure of commodity taxes in the case that policy discrimination is not possible or feasible. If policy discrimination between users or uses is not possible, we show that apart from taxing or subsidizing the direct sources of externalities, it may be optimal to impose taxes or subsidies on related goods, i.e., indirect corrective pricing.     

Thematic Clubs and the Supremacy of Network Externalities

We explore the issue of minorities' survival in the presence of positive network externalities. We rely on a simple example of thematic clubs to illustrate why and how such survival problems might appear, first considering the case of simple‐network effects (fully anonymous externalities) and then the case of cross‐network effects (type‐dependent externalities). In both cases, the analysis is framed as a simple noncooperative game with a continuum of players and binary action sets. There is a unique and interior Nash equilibrium under mild network effects and two corner equilibria under strong network effects, with one club driven out. A utilitarian planner would accentuate the clustering effects of network externalities, and call for the disappearance of the minority club more often than the noncooperative solution. A simple myopic learning algorithm capturing the progression of network lock‐in effects is studied.     

Optimal renewable-energy promotion: Capacity subsidies vs. generation subsidies

We derive optimal subsidization of renewable energies in electricity markets. The analysis takes into account that capacity investment must be chosen under uncertainty about demand conditions and capacity availability, and that capacity as well as electricity generation may be sources of externalities. The main result is that generation subsidies should correspond to externalities of electricity generation (e.g., greenhouse gas reductions), and investment subsidies should correspond to externalities of capacity (e.g., learning spillovers). If only capacity externalities exist, then electricity generation should not be subsidized at all. Our results suggest that some of the most popular promotion instruments cause welfare losses. We demonstrate such welfare losses with data from the German electricity market.     

The welfare effect of quality degradation in the presence of network externalities

This paper examines how the presence of network externalities affects a monopolist's incentive for quality degradation and its welfare consequence. The software and Internet service industries provide our primary motivation. The network externality may lead to a Pareto-improving quality degradation that would not be realised in the absence of network externalities. However, it may also overturn a potentially Pareto-improving quality degradation to a welfare-reducing one, or result in the realisation of a welfare-reducing quality degradation that would be avoided without network externalities. We also endogenise the firm's forward and backward compatibility decisions between the original and degraded goods.     

INTERCONNECTION AGREEMENT BETWEEN INTERNET SERVICE PROVIDERS AND THE OPTIMAL POLICY INTERVENTION: THE CASE OF COURNOT‐TYPE COMPETITION UNDER NETWORK EXTERNALITIES*

We derive the optimal subsidy policy for an interconnection agreement between two symmetric Internet service providers (ISPs) competing á la Cournot in a network service market. The interconnection quality agreed upon is lower than the socially optimal level, as suggested by Crémer et al. (2000 ). In the basic model where both ISPs compete in the domestic market, the optimal investment subsidy rate depends positively on the strength of network externalities. In the extended model where home and foreign ISPs compete in the home market, the optimal subsidy rate for the home government is higher than in the basic model.     

Public policy towards cross subsidy

Although elusive of measurement, cross subsidies are widely believed to have existed on a significant scale in network industries, particularly when these developed under public ownership. After providing careful definitions of when cross subsidy occurs, this article distinguishes eight distinct cases, drawing examples primarily from network sectors. Debates about the desirability of cross subsidy in the context of public enterprise are then reviewed; issues such as the geographical averaging of tariffs and the extent to which non-commercial obligations should be reimbursed by government on the recoup principle are addressed. The policy package of denationalization, liberalization and new forms of regulation have far-reaching implications for cross subsidy policy. For example, liberalization reduces the ability of incumbent enterprises to cross subsidize uneconomic links in a network, particularly if entrants are not subjected to comparable social obligations. Moreover, denationalized enterprises will more vigorously pursue financial profitability, discontinuing cross subsidy related to the traditional equity and political goals, but exploiting cross subsidy as an entry-repelling tool. Both at the member state and European Union levels, there is evidence of confused thinking about the desirability and continued feasibility of cross subsidy; for example, not recognizing the inconsistency involved in imposing non-economic obligations on incumbents while removing barriers to competitive entry. These developments not only erode the viability of the missions of public enterprises in their traditional sectors but also raise issues for public policy if and when technological developments make possible new forms of price discrimination in social sectors.