Innovation, Investment, and Unbundling: An Empirical Update

Abstract

In the Winter 2000 issue of the Yale Journal on Regulation, Thomas M. Jorde, J. Gregory Sidak, and David J. Teece ("JST") commented on some potential economic consequences of the Telecommunications Act of 1996 as implemented by the Federal Communications Commission ("FCC"). The article, published early in the implementation phase of the Act, contained many general assertions about potential consequences, but contained no empirical evidence. JST did, however, offer some interesting and testable propositions. One of these addresses an important issue, verification of which is rather straightforward: JST propose that mandatory unbundling increases the "riskiness and cyclicality of the ILEC's [Incumbent Local Exchange Carrier's] economic performance and, hence, [impacts] on the ILEC's weighted-average cost of capital. Mandatory unbundling raises both components of the weighted-average cost of capital for ILECs-equity and debt.", The purpose of this brief Comment is to perform that empirical test and to compare our empirical results with the expectations of JST.