The impact of incentive regulation on service quality in telecommunications in the United States

A cap on the price of interstate access service was implemented by the Federal Communications Commission in 1991 to provide local exchange carriers (LECs) with an incentive to improve their productive efficiency. A question has arisen as to whether a deterioration in service quality for interstate access service has been an unintended consequence of this cap on the price. The analysis in this article uses several different measures of service quality, including the average installation interval, the percentage of commitments met, total trouble reports, and the average repair interval for both switched access service and special access service, to investigate empirically whether there has been a decline in service quality between 1991 and 2000. The results are conclusive. Overall, service quality has fallen. To rectify the situation, a proposal is offered to adjust the price cap index to penalize LECs who fail to provide an acceptable level of aggregate service quality.