Incentive regulation has become an important regulatory tool in the telecommunications industry in the USA. The issue explored here is whether incentive regulation has resulted in an increase in productive efficiency. After providing an overview of the nature of incentive regulation, a methodology for measuring technical efficiency and its change is introduced. This is a multiple‐output/multiple‐input distance function approach to measuring technical efficiency. The results of implementing this approach for 19 local exchange carriers for the 1988‐1999 period indicate that, in the production of local service, intrastate toll/access service, and interstate access to local loops, there was no change in technical efficiency between the 1988‐1990 and the 1991‐1999 periods, something that incentive regulation was specifically designed to promote.
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