Working Paper: NBER ID: w10287
Authors: Robert S. Pindyck
Abstract: This paper addresses the impact on investment incentives of the network sharing arrangements mandated by the Telecommunications Act of 1996, with a focus on the implications of irreversible investment. Although the goal is to promote competition, the sharing rules now in place reduce incentives to build new networks or upgrade existing ones. Such investments are irreversible -- they involve sunk costs. The basic framework adopted by regulators allows entrants to utilize such facilities at prices reflecting what it would cost a new, efficient, large-scale network to be built. Such sharing opportunities are extensive, covering virtually the entire suite of network services provided, and extremely flexible, as the entrant can rent facilities in small increments for short duration, with no long-term contracts required. Because the entrant does not bear the sunk costs, this leads to an asymmetric allocation of risk and return that is not properly accounted for in the pricing of network services, which creates a significant investment disincentive.
Keywords: No keywords provided
JEL Codes: L0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Network sharing arrangements mandated by the Telecommunications Act of 1996 (L96) | reduced investment incentives for both incumbents and new entrants in the telecom sector (L96) |
| Pricing formula used by regulators to set lease rates for network access (L97) | does not adequately compensate incumbents for their sunk costs (D43) |
| Inadequate compensation for sunk costs (J30) | asymmetric risk-return profile that discourages investment in new infrastructure (H54) |
| Asymmetric risk-return profile (G11) | negative net present values (NPVs) for new investments (G31) |
| Negative net present values (NPVs) for new investments (G31) | threatens the quality and breadth of telecommunications infrastructure in the long run (L96) |
| Regulatory framework (G38) | undermines potential for new technologies and competition (L43) |