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Low-Income Demand for Local Telephone Service: Effects of Lifeline and Linkup

Jan 2008
Working Paper
07-032
By  Daniel Ackerberg, Michael Riordan, Gregory Rosston, Bradley Wimmer
A comprehensive data set on local telephone service prices is used to evaluate the effect of Lifeline and Linkup programs on the telephone penetration rates of low-income households in the United States. Lifeline and Linkup programs respectively subsidize the monthly subscription and initial installation charges of eligible low-income households. This is the first study to use specific rates for telephone service faced by low-income households to explain the telephone penetration rates of low income populations at different locations. Telephone penetration rates are explained by an estimated nonlinear function of local service characteristics (including subsidized prices) and the demographic composition of low-income populations. This empirical specification is based on an underlying discrete choice model of household demand for telephone service and an exact aggregation across demographic groups. A generalized method of moments estimator corrects for endogeneity and clustered heteroskedastic residuals. The resulting estimated median price elasticity of demand for telephone service is -0.027 for the monthly charge and -0.008 for the connection charge, and a policy simulation predicts that low-income telephone penetration rates would be 6.24% lower without Lifeline and Linkup. The analysis also suggests that Linkup is more cost-effective than Lifeline, and that low-income penetration would increase significantly if all states were to automatically enroll eligible households in Lifeline and Linkup programs.