Universal service subsidies and cost overstatement: Evidence from the U.S. telecommunications sector

Sanford V. Berg, Liangliang Jiang, Chen Lin

Research output: Journal article publicationJournal articleAcademic researchpeer-review

5 Citations (Scopus)


Utility subsidies are often defended as promoting universal service. However, specific support formulas may be poorly targeted and/or designed. The U.S. high-cost loop support (HCLS) program (formerly referred to as the Universal Service Fund (USF)), has been a key component of the FCCs USF program. With proposed initiatives for universal access to broadband, it is useful to critically evaluate how the HCLS creates a moral hazard problem. This study finds that companies receiving HCLS subsidies have an incentive to report high costs to the FCC in order to qualify for still higher support payments. Using data from 1136 rural telecom firms in 50 states (19922002), this study shows that some companies respond to current incentives by overstating costs (or incurring higher costs) as they approach the subsidy cutoff points. Compared to the no-subsidy group, companies at the point of greatest subsidy jump appear to overstate costs more due to larger marginal benefits. Such perverse incentives need to be recognized in future universal service initiatives.
Original languageEnglish
Pages (from-to)583-591
Number of pages9
JournalTelecommunications Policy
Issue number7
Publication statusPublished - 1 Aug 2011
Externally publishedYes


  • High cost subsidies
  • Telecommunications
  • Universal service

ASJC Scopus subject areas

  • Electrical and Electronic Engineering
  • Information Systems
  • Human Factors and Ergonomics


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