Property Rights to Radio Spectrum in Guatemala and El Salvador : An Experiment in Liberalization

In the United States and most other countries, wireless communications rely on administrative allocation of radio spectrum. The inefficiencies associated with this centralized approach have led economists, starting with Coase in 1959, to suggest "propertyzing" radio spectrum, enabling competitive markets to determine frequency use. Critics of this approach assert that property rights impose prohibitive transaction costs and limit development of competition and new services. Reforms enacted in Guatemala (in 1996) and El Salvador (in 1997) have moved sharply towards the market alternative suggested by Coase, yielding a natural experiment. Under these two markedly liberal regimes, thousands of exclusive spectrum rights have been issued. Economic evidence generated in the mobile telephone market (comprising the dominant wireless application in terms of economic benefit) suggests that these regimes are associated with a relatively high degree of competitiveness in retail markets, and correspondingly high rates of deployment. Further, the liberal regimes are found to have a positive and statistically significant effect on spectrum availability, providing a link between liberal reforms and consumer welfare gains. Conversely, the irregular policy approach does not appear to generate net transaction costs in the public or private sectors. We conclude that the performance of the wireless phone markets governed by spectrum property rights can be seen to offer "proof of concept" for the normative model proposed by Coase