Skip to main content
Log in

Compliance and competition with heterogeneous service providers: the federal Lifeline program

  • Original Article
  • Published:
Journal of Regulatory Economics Aims and scope Submit manuscript

Abstract

This paper studies how compliance behavior varies across competing service providers in the Lifeline phone subsidy program and assesses whether enlarging the set of providers improves program outcomes. In markets where firms compete to provide government benefits or services directly to individuals, the most productive firms—in terms of service quality or operating costs—survive and serve the market. However, imperfect enforcement of program rules may weaken competitive pressures through non-compliance, allowing less productive firms to maintain market share. I exploit institutional features of the Lifeline program, state-level variation in regulatory environments and a one-time reform, to empirically document the importance of provider heterogeneity following a 2008 expansion of Lifeline. The presence of low-compliance providers in particular markets drives the largest state-level differences in wasteful or inefficient program spending. Qualitatively, these providers appear to select into state markets with looser enforcement of program rules. In counterfactual simulations, excluding low-compliance providers prevents 500,000 ineligible enrollments, while only reducing eligible enrollments by 100,000. Further restrictions come at a higher cost, reflecting the trade-off of compliance and competition.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5
Fig. 6
Fig. 7
Fig. 8

Similar content being viewed by others

Notes

  1. See Eriksson et al. (1998) and Riordan (2002) for early studies of Lifeline and subsidized universal telephone service programs more broadly.

  2. “Millions Improperly Claimed U.S. Phone Subsidies,” The Wall Street Journal, February 11th, 2013; “Who Gets Rich Off ‘Free’ Government Phones?” CNN Money, October 26th, 2012.

  3. Related literature on imperfect competition with heterogeneous firms has shown how minimum productivity thresholds of this type fall with product differentiation and search frictions (Dinlersoz and Yorukoglu 2012; Hortacsu and Syverson 2004; Syverson 2004a, b).

  4. This paper focuses on the efficient use of government funds to achieve program enrollment goals, where decreasing returns from firm entry come from service provided to unintended beneficiaries. This is in contrast to the literature documenting socially inefficient levels of entry which arise from the sunk costs of additional entrants (Berry and Waldfogel 1999; Hsieh and Moretti 2003; Mankiw and Whinston 1986; Wolinsky 1984).

  5. Beard et al. (2015) study the roles of consumer choice and consumer complaints in disciplining the quality offered by local-exchange telephone providers, showing that stronger competition leads to more consumer switching in place of complaints.

  6. The observed heterogeneity in oversight across different state regulators is consistent with the findings of Macher et al. (2011) and subsequent literature, which further explores the determinants of endogenous oversight effort.

  7. See “Comments of Sprint Nextel Corporation” and “Comments of TracFone Wireless Inc.,” FCC Docket No. 11-42, April 21st, 2011.

  8. While not directly consumer-facing, the costs of particularly strict oversight have been shown in the realm of charitable foundations: tax reforms aimed at stopping the misuse of funds substantially reduced entry by charitable foundations and genuine gifts to the groups, with larger effects in states with weaker pre-reform rules (Marx 2015).

  9. Rosston and Wimmer (1998, 2000) and Valletti et al. (2002) have addressed issues of compliance, competition, and entry in earlier landline universal service programs, but these papers consider scenarios where the regulations are a cost imposed on providers, rather than a profitable business opportunity.

  10. In most states, a household is eligible if its income is below 135% of the federal poverty guidelines or if it is enrolled in Medicaid, SNAP (food stamps), SSI, or one of several other means-tested benefit programs.

  11. In addition, Rodini et al. (2003) and Ward and Woroch (2010) estimate cross-price elasticities between landline and wireless service from household bill data, with the latter paper explicitly using the availability of landline Lifeline subsidies as a natural experiment.

  12. TracFone ETC Designation, April 9th, 2008 in FCC Docket No. 96-45. TracFone’s exemption from the facilities-based requirement was granted by the TracFone Forbearance Order, September 6th, 2005, FCC Docket No. 96-45.

  13. This arrangement allows relatively low fixed costs of establishing a new wireless brand.

  14. The sharp economic downturn during this period likely contributed to rising demand and eligibility for Lifeline service. Conkling (2018) and Ukhaneva (2015) provide evidence of the importance of the Lifeline expansion in explaining enrollment growth while controlling for general economic conditions.

  15. The data in this paper (including Figs. 1 and 2) exclude Oklahoma and Alaska, due to differences in their Lifeline rules and extensive participation in the Tribal Lifeline program. This is why the 2012 subsidy spending number is below $2 billion in Fig. 1. For example media coverage and legislative proposals, see “‘Obama Phones’ Subsidy Program Draws New Scrutiny On The Hill,” The Washington Post, April 9th, 2013; H.R. 176—Stop Taxpayer Funded Cell Phone Act of 2011, introduced in 113th Congress, January 4th, 2013.

  16. These findings are consistent with those in Macher et al. (2017), which estimates households have strong demand for multiple phone connections. Simulations in that paper suggest the Lifeline program could significantly increase enrollments by moving from a one-per-household to one-per-person restriction.

  17. For additional details, see FCC (2012) and “Comments of TracFone Wireless Inc.,” FCC Docket No. 11-42, April 21st, 2011.

  18. An important exception are the eleven states which defer decisions on provider admittance to the FCC. The included states are AL, CT, DC, DE, FL, MA, NC, NH, NY, TN, and VA.

  19. Lifeline providers do compete on plan quality, particularly the number of minutes and texts included. However, this largely takes place at the national level, and during the period studied in this paper, nearly all providers were offering the same 250 min per month. For additional details on plan offerings and applications, see Conkling (2018).

  20. “Millions Improperly Claimed U.S. Phone Subsidies,” The Wall Street Journal, February 11th, 2013; “Who Gets Rich Off ‘Free’ Government Phones?” CNN Money, October 26th, 2012.

  21. Cases of ineligible households receiving benefits also occurred but were considered a less urgent priority than cases of duplicative or multiple enrollment (FCC 2011).

  22. One exception is Cricket Wireless, which offered Lifeline plans with unlimited usage for set monthly fees and had sizable enrollment. Given the narrow market definition in this paper, households enrolling with Cricket would be observed in the outside option.

  23. See Eriksson et al. (1998) and subsequent literature cited in Sect. 2.1 for detailed studies of the period prior to the entry of free Lifeline providers.

  24. All free providers of significant size have been accounted for, though it is possible that some very small providers have been omitted.

  25. The FCC uses these Census Bureau datasets for their own estimates of the number of eligible households (GAO 2010).

  26. An implicit assumption here is that the firm is a potential entrant in all markets. This assumption is supported by the evidence in the Lifeline market, but the general idea does not depend on it. As long as there is a similar distribution of potential entrants in each market, the same results will follow.

  27. The demand model is most similar to Berry and Waldfogel (1999), which uses market share data to estimate the parameters of competition in the radio broadcast industry.

  28. See Besley and Case (1995, 2003), Garvie and Keeler (1994), Poterba (1994) and Reed (2006) for examples from the large literature on the determinants of regulations and policy.

  29. This approach is similar to the estimation of a “crowding” parameter as described in Ackerberg and Rysman (2005), which can be used to separately identify crowding effects and cross-price elasticities when the choice model includes product prices.

  30. I interpret \(r_{s}\) as an enforcement term, but the parameter will also absorb the effects of other state characteristics that influence the number of ineligible enrollments.

  31. For the few firm-market combinations with a 0% retention rate, I assume the firm retained 1% of subscribers, since estimation requires taking the log of market share.

  32. Cincinnati Bell, Platinumtel, Telops, True Wireless, and US Connect.

  33. “The $272 billion swindle,” The Economist, May 31, 2014.

  34. “Medicaid Shift Fuels Rush for Profitable Clients,” The New York Times, May 8th, 2014.

  35. “Tax Preparers Targeting Poor with High Fees,” The New York Times, April 7th, 2014.

  36. “Senate Committee Report on For-Profit Colleges Condemns Costs and Practices,” The New York Times, July 29th, 2012.

  37. “Undercover Testing Finds Fraud and Abuse at Selected Head Start Centers,” Government Accountability Office, May 18th, 2010.

References

  • Ackerberg, D. A., DeRemer, D. R., Riordan, M. H., Rosston, G. L., & Wimmer, B. S. (2014). Estimating the impact of low-income universal service programs. International Journal of Industrial Organization, 37, 84–98.

    Article  Google Scholar 

  • Ackerberg, D. A., & Rysman, M. (2005). Unobserved product differentiation in discrete-choice models: Estimating price elasticities and welfare effects. RAND Journal of Economics, 36(4), 771–788.

    Google Scholar 

  • Beard, T. R., Macher, J. T., & Mayo, J. W. (2015). “Can you hear me now?” Exit, voice, and loyalty under increasing competition. The Journal of Law and Economics, 58(3), 717–745.

    Article  Google Scholar 

  • Berry, S., & Waldfogel, J. (1999). Free entry and social inefficiency in radio broadcasting. RAND Journal of Economics, 30(3), 397–420.

    Article  Google Scholar 

  • Berry, S. T. (1994). Estimating discrete-choice models of product differentiation. The RAND Journal of Economics, 25, 242–262.

    Article  Google Scholar 

  • Besley, T., & Case, A. (1995). Does electoral accountability affect economic policy choices? Evidence from gubernatorial term limits. The Quarterly Journal of Economics, 110, 769–798.

    Article  Google Scholar 

  • Besley, T., & Case, A. (2003). Political institutions and policy choices: Evidence from the United States. Journal of Economic Literature, 41, 7–73.

    Article  Google Scholar 

  • Burton, M., Macher, J., & Mayo, J. W. (2007). Understanding participation in social programs: Why don’t households pick up the Lifeline? The BE Journal of Economic Analysis & Policy, 7(1). https://doi.org/10.2202/1935-1682.1583.

  • Cardell, N. S. (1997). Variance components structures for the extreme-value and logistic distributions with application to models of heterogeneity. Econometric Theory, 13, 185–213.

    Article  Google Scholar 

  • Conkling, T. S. (2018). Crowd-out or affordability? The Lifeline expansion’s effect on wireless service spending. Journal of Policy Analysis and Management, 37(2), 357–383.

    Article  Google Scholar 

  • Darby, M. R., & Karni, E. (1973). Free competition and the optimal amount of fraud. Journal of Law & Economics, 16, 67.

    Article  Google Scholar 

  • Dinlersoz, E. M., & Yorukoglu, M. (2012). Information and industry dynamics. American Economic Review, 102(2), 884–913.

    Article  Google Scholar 

  • Egan, M., Matvos, G., & Seru, A. (2019). The market for financial adviser misconduct. Journal of Political Economy, 127(1), 233–295.

    Article  Google Scholar 

  • Eriksson, R. C., Kaserman, D. L., & Mayo, J. W. (1998). Targeted and untargeted subsidy schemes: Evidence from postdivestiture efforts to promote universal telephone service. The Journal of Law and Economics, 41(2), 477–502.

    Article  Google Scholar 

  • FCC. (2011). Duplicative program payments order. WC Dkt. No. 11-42 et al., 11-97

  • FCC. (2012). Lifeline reform order. WC Dkt. No. 11-42 et al., 12-11

  • GAO. (2010). Improved management can enhance FCC decision making for the Universal Service Fund Low-Income Program. GAO-11-11

  • Garvie, D., & Keeler, A. (1994). Incomplete enforcement with endogenous regulatory choice. Journal of Public Economics, 55(1), 141–162.

    Article  Google Scholar 

  • Griffin, J. M., & Maturana, G. (2016). Who facilitated misreporting in securitized loans? The Review of Financial Studies, 29(2), 384–419.

    Article  Google Scholar 

  • Hart, O., Shleifer, A., & Vishny, R. W. (1997). The proper scope of government: Theory and an application to prisons. The Quarterly Journal of Economics, 112(4), 1127–1161.

    Article  Google Scholar 

  • Hauge, J. A., Jamison, M. A., & Jewell, R. T. (2007). Participation in social programs by consumers and companies: A nationwide analysis of participation rates for telephone Lifeline programs. Public Finance Review, 35(5), 606–625.

    Article  Google Scholar 

  • Hauge, J. A., Jamison, M. A., & Jewell, R. T. (2008). Discounting telephone service: An examination of participation in the Lifeline assistance program using panel data. Information Economics and Policy, 20(2), 135–149.

    Article  Google Scholar 

  • Hortacsu, A., & Syverson, C. (2004). Product differentiation, search costs, and competition in the mutual fund industry: A case study of S&P 500 index funds. The Quarterly Journal of Economics, 119(2), 403–456.

    Article  Google Scholar 

  • Hsieh, C. T., & Moretti, E. (2003). Can free entry be inefficient? Fixed commissions and social waste in the real estate industry. Journal of Political Economy, 111(5), 1076–1122.

    Article  Google Scholar 

  • Klein, B., Crawford, R. G., & Alchian, A. A. (1978). Vertical integration, appropriable rents, and the competitive contracting process. Journal of Law & Economics, 21, 297.

    Article  Google Scholar 

  • Levin, J., & Tadelis, S. (2010). Contracting for government services: Theory and evidence from U.S. cities. The Journal of Industrial Economics, 58(3), 507–541.

    Article  Google Scholar 

  • Luca, M., & Zervas, G. (2016). Fake it till you make it: Reputation, competition, and yelp review fraud. Management Science, 62(12), 3412–3427.

    Article  Google Scholar 

  • Macher, J. T., Mayo, J. W., & Nickerson, J. A. (2011). Regulator heterogeneity and endogenous efforts to close the information asymmetry gap. The Journal of Law and Economics, 54(1), 25–54.

    Article  Google Scholar 

  • Macher, J. T., Mayo, J. W., Ukhaneva, O., & Woroch, G. A. (2017). From universal service to universal connectivity. Journal of Regulatory Economics, 52(1), 77–104.

    Article  Google Scholar 

  • Mankiw, N. G., & Whinston, M. D. (1986). Free entry and social inefficiency. The RAND Journal of Economics, 17, 48–58.

    Article  Google Scholar 

  • Marx, B. M. (2015). Has regulation of charitable foundations thrown the baby out with the bath water? Journal of Public Economics, 129, 63–76.

    Article  Google Scholar 

  • Polsky, D., David, G., Yang, J., Kinosian, B., & Werner, R. M. (2014). The effect of entry regulation in the health care sector: The case of home health. Journal of Public Economics, 110, 1–14.

    Article  Google Scholar 

  • Poterba, J. M. (1994). State responses to fiscal crises: The effects of budgetary institutions and politics. Journal of Political Economy, 102, 799–821.

    Article  Google Scholar 

  • Reed, W. R. (2006). Democrats, Republicans, and taxes: Evidence that political parties matter. Journal of Public Economics, 90(4), 725–750.

    Article  Google Scholar 

  • Riordan, M. (2002). Universal residential telephone service. Handbook of Telecommunications Economics, 1, 423–473.

    Google Scholar 

  • Rodini, M., Ward, M. R., & Woroch, G. A. (2003). Going mobile: Substitutability between fixed and mobile access. Telecommunications Policy, 27(5), 457–476.

    Article  Google Scholar 

  • Rosston, G. L., & Wimmer, B. S. (1998). The ABC’s of universal service: Arbitrage, big bucks, and competition. Hastings LJ, 50, 1585.

    Google Scholar 

  • Rosston, G. L., & Wimmer, B. S. (2000). The state of universal service. Information Economics and Policy, 12(3), 261–283.

    Article  Google Scholar 

  • Stango, V., & Zinman, J. (2011). Fuzzy math, disclosure regulation, and market outcomes: Evidence from truth-in-lending reform. Review of Financial Studies, 24(2), 506–534.

    Article  Google Scholar 

  • Syverson, C. (2004a). Market structure and productivity: A concrete example. Journal of Political Economy, 112(6), 1181–1222.

    Article  Google Scholar 

  • Syverson, C. (2004b). Product substitutability and productivity dispersion. Review of Economics and Statistics, 86(2), 534–550.

    Article  Google Scholar 

  • Ukhaneva, O. (2015). Universal service in a wireless world. In 2014 TPRC conference paper Available at SSRN. https://ssrn.com/abstract=2430713.

  • Valletti, T. M., Hoernig, S., & Barros, P. P. (2002). Universal service and entry: The role of uniform pricing and coverage constraints. Journal of Regulatory Economics, 21(2), 169–190.

    Article  Google Scholar 

  • Ward, M. R., & Woroch, G. A. (2010). The effect of prices on fixed and mobile telephone penetration: Using price subsidies as natural experiments. Information Economics and Policy, 22(1), 18–32.

    Article  Google Scholar 

  • Wolinsky, A. (1984). Product differentiation with imperfect information. The Review of Economic Studies, 51(1), 53–61.

    Article  Google Scholar 

Download references

Acknowledgements

This paper is the result of the author’s independent research and does not necessarily represent the views of the Consumer Financial Protection Bureau or the United States. It is a substantially revised version of Chapter 1 of the author’s Ph.D. dissertation. The author thanks Alan Sorensen, Ken Hendricks, and Amit Gandhi for their advice and support, as well as Scott Fulford, Andrea Guglielmo, Justine Hastings, Benedic Ippolito, Nathan Marwell, Marquise McGraw, Judith Ricks, seminar participants at the American Enterprise Institute, Census Bureau, Consumer Financial Protection Bureau, Federal Communications Commission, Federal Trade Commission, Office of the Comptroller of the Currency, TPRC Conference, Treasury Department, and the University of Wisconsin, and several anonymous referees for helpful comments and suggestions.

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Thomas S. Conkling.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Appendix

Appendix

See Tables 3 and 4.

Table 3 Demand estimates with state-level covariates
Table 4 Compliance and enforcement estimates

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Conkling, T.S. Compliance and competition with heterogeneous service providers: the federal Lifeline program. J Regul Econ 57, 74–104 (2020). https://doi.org/10.1007/s11149-020-09400-5

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11149-020-09400-5

Keywords

JEL Classification

Navigation