Costs, productivity, and firm heterogeneity in local telephone markets

In the last few decades, the telecommunications industry has experienced dramatic technological change. However, since divestiture of AT&T, there have been only a few studies that estimate the effects of technological change. Using a cost function, we estimate these effects. Unlike previous studies, we model unobserved heterogeneity in the error structure. We find strong evidence in favor of heterogeneity and that accounting for heterogeneity provides estimated effects of technological change that are smaller and estimated scale effects that are larger than those without controls for heterogeneity.