Measuring productivity change in telecommunications

Incentive regulation in the form of price caps is now an important regulatory tool in the telecommunications industry in the United States. As part of the implementation of incentive regulation, there is a need to measure accurately the change in productivity. In this paper an approach is introduced that not only provides a measure of the change in productivity but the technique also allows for a decomposition into two mutually exclusive and exhaustive components - changes in technical efficiency over time and shifts in technology over time. Using data on four output measures and six input measures for three time periods for 19 individual LECs, the indicate that productivity increased by about 34% between 1988 and 1998 or about 3.0% per year. This growth is due primarily to innovation rather than improvements in efficiency. Of the 19 LECs in the sample, 12 were operating efficiently throughout the entire 1988-1998 period. Of the remaining 7, 5 showed a slight improvement in efficiency while the efficiency of two declined. In the aggregate, however, efficiency improved. Finally, a comparison is made between two methods of estimating the change in productivity. The conventional-growth-accounting approach and the Malmquist index approach yield somewhat different results. Essentially the same data are used so that the primary difference is most likely in the technique applied.Productivity measurement Price cap regulation Incentive regulation Malmquist index