The Bell System divestiture/deregulation and the efficiency of the operating companies

A variety of casual evidence has been offered in measurement of the efficie ncies, and inefficiencies, thought to flow from the Bell System divestiture and accompanying state regulatory reforms, To address several questions in this regard we estimate a regulated cost function for local exchange servi ces using panel data on the divested Bell Operating Companies (BOCs). Dives titure and regulatory reform are found to have produced significant efficie ncies, as of 1993 saving about 20 percent in cost relative to what would ha ve obtained in the absence of these events. More specifically, to 1993 the divestiture yielded savings of $115.4 billion and state-level regulatory re form yielded a slightly smaller $96.7 billion in savings (both measured in 1993 dollars). Output augmentation, factor bias, and allowed rate-of-return effects contribute in identified ways to these overall results.