new technology. They then demonstrate that different forms of incentive regulation helped
encourage the deployment of fibre optic cable during the 1990s. However, the different forms of
incentive regulation they considered were not generally more conducive to raising overall
investment relative to firms operating under rate-of-return regulation.16 Greenstein, McMaster and
Spiller (1996) also find strong econometric evidence in favour of the investment promoting effect
of price cap regulation in the US telecommunication sector. In particular, when controlling for
local demographic and economic factors, firm-specific financial indicators and the general
regulatory environment, the authors unravel that investment in fibre-optic cable deployment,
ISDN and software updates during the late 1980s and early 1990s was substantially higher under
price cap regimes. They estimate that in the United States at the end of the period under study,
fibre-optic cable deployment would have been by 75% higher if price cap regimes had been in
place everywhere.
A two-way causal link seems to exist between the incumbent’s and facilities-based entrants’
decisions to deploy fibre ring in the same city (Woroch, 2000).17 On the one hand, incumbents
react swiftly to the deployment of fibre rings by new entrants. This can be interpreted as a
predatory response or because new entry is viewed as signalling new profit opportunities. On the
other hand, new entrants invest in their own network as a result of the incumbent’s investment
decisions. Furthermore, the estimation results reveal that the incumbent’s level of investment
does not depend on the regulatory policy with regard to the access of their network by new
providers whilst new entrants invest more if they can access the incumbent’s network.
Other evidence is less supportive of the role of incentive regulation in promoting the deployment
of new technology. For example, Floyd and Gabel (2003), using a cross sectional dataset for
2001, find that some types of incentive regulation are associated with both lower and higher
investment rates for four kinds of new technologies, relative to rate-of-return regulation.18 To
some extent, these findings may also reflect other differences in the regulatory regime. For
instance, empirical evidence for the US telecommunication sector suggests that regulators tend to
16. The results of Ai and Sappington (2002) also provide some weakly significant and not very
robust evidence that incentive regulation and competition may reinforce each other’s effect on
investment. Their approach controlled for multi-collinearity in a large pool of possible
explanatory variables and they accounted for potential endogeneity of the regulatory regime.
17. The sample contains firm level data concerning 128 US cities from 1983 to 1992.
18. The types of new technologies were packet switching, digital signal 1, digital signal 3 and optical
carrier.
11