Working Paper: NBER ID: w5770
Authors: Shane M. Greenstein; Pablo T. Spiller
Abstract: While much economic policy presumes that more information infrastructure yields higher economic returns, little empirical work measures the magnitudes of these returns. We examine investment by local exchange telephone companies in fiber optic cable, ISDN lines and signal seven software, infrastructure which plays an essential role in bringing digital technology to local telephone networks. We estimate the elasticity of the derived demand for infrastructure investment faced by local exchange companies, controlling for factors such as local economic activity and the political disposition of state regulators. Our model postulates a regulated profit maximizing local exchange firm and a regulatory agency with predetermined political leanings in favor of consumer prices or firm profits. The model accounts for variation in state regulation and local economic conditions. In all our estimates we find that consumer demand is sensitive to investment in modern infrastructure, particularly as represented by fiber optic cable. Our estimates imply that infrastructure investment is responsible for a substantial fraction of the recent growth in consumer surplus and business revenue in local telecommunication services.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| infrastructure investment (H54) | consumer surplus (D46) |
| fiber optic deployment (L96) | consumer surplus (D46) |
| local economic activity (R11) | infrastructure investment (H54) |
| political disposition of state regulators (K23) | infrastructure investment (H54) |
| infrastructure investment (H54) | business revenue (H27) |
| political and regulatory environment (G38) | returns to infrastructure investment (H54) |
| ISDN lines (L96) | consumer surplus (D46) |
| SS7 (L96) | consumer surplus (D46) |