Abstract
A variety of casual evidence has been offered in measurement of the efficiencies, and inefficiencies, thought to flow from the Bell System divestiture and accompanying state regulatory reforms. To address several questions in this regard we estimate a regulated cost function for local exchange services using panel data on the divested Bell Operating Companies (BOCs). Divestiture and regulatory reform are found to have produced significant efficiencies, as of 1993 saving about 20 percent in cost relative to what would have obtained in the absence of these events. More specifically, to 1993 the divestiture yielded savings of $115.4 billion and state‐level regulatory reform yielded a slightly smaller $96.7 billion in savings (both measured in 1993 dollars). Output augmentation, factor bias, and allowed rate‐of‐return effects contribute in identified ways to these overall results.
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