The issue explored is whether incentive regulation of local exchange carriers in the USA has resulted in an increase in efficiency. After providing an overview of the nature of incentive regulation, the methodology for measuring the effects of incentive regulation on efficiency is reviewed. This methodology is data envelopment analysis and allows for the measurement of both technical efficiency and allocative efficiency of individual local exchange carriers. The results of empirically implementing the data envelopment approach (DEA) approach indicate that there is little change in technical efficiency. In fact average technical efficiency in 1988 was the same as in 2001. Next, while outputs continued to grow at about their historical rate across LECs, the sizeable increase in the two types of capital increased inputs well above their historical average rates for some LECs leading to short run allocative inefficiency. On average, however, allocative efficiency shows no identifiable trend between 1988 and 2001. Finally, in the aggregate, total economic efficiency does not demonstrate any trend between 1988 and 2001.
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