Efficient Spectrum Reallocation with Hold-Ups and Without Nirvana

Thomas W. Hazlett, Professor of Law and Economics and Director, Information Economy Project, George Mason University and Clemson University

In 2010, the U.S. Federal Communications Commission (FCC) determined that
up to 20 television channels should be shifted to mobile services. If successful,
the reform could generate over $1 trillion in social gains. To achieve these
efficiencies, regulators rejected traditional tools, which would have terminated
existing wireless licenses, as too contentious. Instead, they chose to create a
two-sided auction in which incumbent TV licensees state their offer prices to
exit (broadcasting), being paid from the winning bids for mobile licenses
(granted access to the reallocated TV spectrum). The FCC conducts this
“incentive auction” and, importantly, unilaterally reassigns TV channels for
stations remaining on the air. These involuntary transfers are designed to
eliminate station hold-ups, allowing new blocks of contiguous spectrum (more
valuable than scattered frequencies of equivalent bandwidth) to be made
available for mobile licenses. A rival policy option – “overlay licenses” —
would grandfather existing TV stations and then auction new licenses permitting
liberal use of the TV Band (i.e., not restricted to broadcasting). Overlay winners
could then bargain with TV stations to make more bandwidth available for
mobile broadband. Policy makers rejected this approach on the grounds that
incumbent TV licensees would engage in strategic hold-up, pre-empting
efficient deals. But so, too, are hold-ups endemic in the design and
implementation of incentive auctions; to asymmetrically ignore these costs is to
commit the Nirvana Fallacy. This paper offers a template to avoid the Fallacy,
evaluating transaction costs across the rival policy regimes. A first order
quantification suggests that the costs of incentive auctions have been
substantially under-estimated by regulators, perhaps reflecting confirmation bias
and a principal-agent conflict in the assessment of policy options.

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