Institutions, Telecommunications Dynamics and Policy Challenges: Theory and Empirical Analysis for Germany

The telecommunications sector was liberalized in the US and the EU in 1984 and 1998, respectively. In EU countries, price cap regulation has shaped this sector in a pro-competitive way that - with telecommunications obviously being a key element of the information and communications sector (ICT) - has obviously contributed to higher employment and growth. Integrating the use of telecommunications in a macroeconomic production function is the analytical starting point for our interdependent analysis of output, use of telecommunications and employment. Based on unit root and co-integration analysis as well as an error correction three-equation model which are estimated simultaneously, we present results both on long run links and short run links between telecommunications, output and employment. Considering various scenarios suggests that a fall in the relative price of telecommunications can generate a cumulated employment increase of 760,000 within seven years. This points to the need for maintaining the regulation of fixed-line telecommunications networks in Germany with due emphasis on efficiency-enhancing competition. The institutional setup for regulating telecommunications could be improved in Germany and other EU countries.