The adoption of incentive regulation schemes and its impact on the United States local telecommunications industry

This dissertation consists of four chapters. Together they provide a positive analysis of the evolution of policy in the U.S. telecommunications industry, where various incentive regulation schemes have replaced the traditional rate-of-return regulation. These regulatory innovations have occurred against a background of technical and demand changes in this industry, and have been designed to accommodate these changes. The dissertation starts with a literature review in Chapter 1.;Chapter 2, a case study, investigates the regulations in New York State, where New York Telephone and Rochester Telephone have adopted incentive schemes over the past decade. Their different experiences shed light on the process of implementing incentive schemes, and they provide the hypotheses and foundations for the later empirical research.;Chapter 3 empirically investigates the adoption of incentive schemes from 1986 to 1994 by 101 local telephone companies within the 48 contiguous U.S. states and the District of Columbia. It treats the adoption as the result of an interactive process between the regulator and the regulated firm; adoption happen only if they reach a consensus, and each party's decision can be strategic. It employs a multiple selection criteria model, assigned to each party an ordered probit model to decide whether and when to adopt, where adoption is a function of the parties' economic, demographic, and institutional characteristics. The results reveal that the parties use different decision criteria: the regulator decides when to adopt and the firm whether to adopt. The model generates accurate predictions of regulatory regimes.;Chapter 4 empirically examines how the adoption of incentives schemes affects the investment patterns of these companies over time, represented by the growth of their fiber optic cable deployment. It finds that the new regulations have not significantly promoted investment; a firm's investment largely follows the course determined by its characteristics and the passing of time. After 10,000 simulations, a permutation test finds that with probability 87.3%, firms under rate-of-return regulation have exhibited no less investment growth than those under the new regulations.