Why do Regulatory Outcomes Vary so Much? Economic, Political and Institutional Determinants of Regulated Prices in the US Telecommunications Industry

Abstract

Regulatory outcomes can vary substantially from one US state to the next. For example, at the end of 2002 regulated prices for access to the local loops of incumbent telephone networks varied from $2.79 per month in downtown Chicago, IL to $7.70 in Manhattan, NY to $12.14 in Houston, TX. Regulatory outcomes can also vary substantially over time within a state. For example, the regulated price for local loops in downtown Little Rock, AR rose from $14.00 in 1998 to $18.75 in 2000 before falling to $11.86 by the end of 2002. Obvious economic factors such as technological and geographic cost considerations might explain some of this variation, but cannot explain all. There remain sizeable and varying gaps between regulated prices and costs. This research attempts to explain these gaps using between and within state variation in political and institutional environments. While prior studies have found limited effects of private money (in the form of campaign finance contributions) on legislative outcomes, we find a significant effect of private money on regulatory decisions. A one standard deviation increase in the percentage of contributions in an electoral cycle by entrants to the industry is associated with a fall of around three-tenths of a standard deviation in the regulated local loop price (around $1.36 per month). We also find evidence that legislative ideologies, constituency demographics, state parochial effects and institutional variables all play significant roles in the shaping of important regulatory decisions in the telecommunications industry.