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

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. 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. 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. Estimated median price elasticity of demand for telephone service is -0.027 for the monthly charge and -0.008 for the connection charge. 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.