The impact of incentive regulation on productivity in the US telecommunications industry: A stochastic frontier approach

This paper investigates whether the substitution of price cap regulation (PCR) and other forms of incentive regulation for traditional rate of return regulation (RRR) has had a measurable effect on productivity growth in the US telecommunications industry. A stochastic frontier approach is employed to compute the efficiency change, technological progress, and productivity growth for 25 LECs over the 1988-1998 time periods. By examining the relationship between the change in productivity growth and regulatory regime variables and other control variables, we find that PCR has a significant and positive effect, both in contemporaneous and lagged specifications.