Review of Industrial Organization 18: 283–300, 2001.
© 2001 Kluwer Academic Publishers. Printed in the Netherlands.
Productivity Change, Technical Progress, and
Efﬁciency Improvement in Telecommunications
NOEL D. URI
Competitive Pricing Division, Common Carrier Bureau (Room 5A-431), Federal Communications
Commission, Washington, DC 20554, U.S.A.
Abstract. Implementation of incentive regulation in telecommunications requires the accurate meas-
urement of the change in productivity. An approach is introduced that not only provides a measure
of the change in productivity but 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 annual data on four output measures and six input measures for the period 1988 to 1998
for nineteen individual local exchange carriers, the results indicate that productivity increased by
about 5.0 percent per year. This growth is due primarily to innovation rather than improvements in
efﬁciency. Of the nineteen LECs in the sample, thirteen were operating efﬁciently throughout the
entire 1988–1998 period. Of the remaining six, two showed a slight improvement in efﬁciency while
the efﬁciency of four declined. In the aggregate, however, there was virtually no change in efﬁciency.
Finally, a comparison is made between two methods of estimating the change in productivity. The
conventional growth accounting approach yields a lower estimate of the rate of change in productivity
than does the Malmquist index approach. The difference between these estimates is interpreted as the
lower bound of the bias associated with the conventional growth accounting approach to measuring
the growth in productivity.
Key words: Federal Communications Commission, incentive regulation, productivity measurement,
Measurement of the change in productivity is an important component of incentive
regulation that has been adopted in the telecommunications industry in the United
States. The conventional growth accounting approach that has previously been used
in calculating productivity change has several shortcomings. After reviewing these
limitations, an alternative approach will be introduced to measure productivity
change. In addition to providing an estimate of the change in productivity, the
technique allows for a decomposition into two mutually exclusive and exhaustive
components – changes in technical efﬁciency over time and shifts in technology
The views expressed are those of the author and do not necessarily represent the policies of the
Federal Communications Commission or the views of other Federal Communications staff members.