An empirical analysis of incentive regulation and the allocation of inputs in the US telecommunications industry

A translog cost function is estimated to examine whether carriers use an efficient combination of inputs in the telecommunications industry. Special attention is given to the role of rate regulation reform in an increasingly competitive business environment. Findings suggest that telecommunications carriers facing price-cap regulation do use an efficient mix of labor and capital. In contrast, the condition for cost minimizing use of inputs is not met for telecommunications carriers facing rate-of-return. The superior factor input use allocation by carriers facing price-cap regulation compared to carriers facing rate-of-return regulation is interpreted as suggesting that incentive regulation plays an important role in promoting efficient use of inputs even in a competitive business environment.