Mayo issues Economic Policy Vignette: “Regulation and Investment: Sk(r)ewing the Future for 21st Century Telecommunications?”

John Mayo, professor of economics, business, and public policy in Georgetown University’s McDonough School of Business and executive director of the Georgetown Center for Business and Public Policy issued an Economic Policy Vignette, “Regulation and Investment: Sk(r)ewing the Future for 21st Century Telecommunications?”

A great deal has been written in policy circles over the last decade about the relationship if any between the imposition of regulation and the level of investment by regulated firms in the telecommunications sector. Most recently, some have argued, in the context of the Federal Communication Commission’s (FCC) imposition of common-carrier regulation on broadband providers, that the consequence will be that firms subject to the additional regulation will significantly reduce investments needed to upgrade and expand the digital infrastructure necessary to produce the high-quality, affordable broadband services that Americans have come to expect and that policymakers want to see provided. Others have argued that no such effect should be expected or observed.

Assessing which narrative is correct is made difficult for a variety of reasons because the degree of regulatory stringency of an industry is just one of numerous factors that affect a company’s evaluation of whether and how much to invest at any particular time.

Yet, while this debate over the potential relationship of regulation and the level of investment in the broadband sector is crucial, it misses another equally important impact that regulation has in investment-hungry industries. Specifically, a careful reading of the economic literature as well as an examination of observed investment patterns in the face of regulatory changes reveal that independent of any impact regulation may have on the level of investment, the imposition of additional regulation may alter the mix of investments. Importantly, any resulting distortions to the mix of investment may be as harmful to consumers and the future of the telecommunications industry as any impacts on the level of investment.