Will Common Carrier Regulation Reduce Investment?

To be sure, one cannot be absolutely certain, as a matter of “scientific fact,” that any specific policy “works” or “fails to work.” There simply are too many variables, and no way to create control groups.

Still, the argument is that common carrier regulation (applying Title II to Internet access) does not dictate specific rates of return, and it does not stimulate entry, but it does likely increase costs and regulatory hurdles for providers, authors Kevin A. Hassett, American Enterprise Institute director of economic policy studies and Robert J. Shapiro, Georgetown Center for Business and Public Policy senior policy fellow.

Such a framework increases uncertainty, and uncertainty almost always leads to delays in long-lived investments.

Common carrier regulation could lead to substantial price increases and consumer costs on top of any universal service fees, they also argue.

In the case of telephone service, numerous studies have found that common carrier regulation inhibited competition, discouraging and dramatically slowing innovations in telephone service, the study argues.

Innovation always entails substantial risk of failure and often involves substantial sunk costs. Therefore, we should expect that the incentives to assume those risks and bear those costs are greatest when the additional costs of regulation are absent, they argue.

The authors note that as the Federal Communications Commission  phased out some of its regulation of telephony carriers, new service offerings increased by 60 percent to 99 percent.

Some studies also suggest that if the regulatory system had never been applied to telecom, consumers would have 62 percent more services.

The authors argue it is reasonable to expect large negative effects on investment from Title II regulation, if Title II regulations move the United States closer to the European regulatory model that prevailed in continental Europe in the first decade of the 21st century.

Again, the problem is that researchers, policymakers and economists do not all agree on the likely impact of Title II regulation on investment levels, and there is no way to create a control group.

But some would argue it is likely that when profit margins are limited, investment will be limited. When profit margins are unlimited, more investment will likely be made, all other things being equal.