Does Public Competition Crowd Out Private Investment? Evidence from Municipal Provision of Internet Access

Abstract

Government investment in infrastructure may crowd out private investment that would have otherwise occurred. But, the threat of government intervention may also induce private firms to invest preemptively in infrastructure, in order to maintain their market position. This leaves the net effect of public competition on private investment unclear. This paper investigates the tension between these competing effects by providing evidence from the setting of internet service provision. Using household survey data and a novel data set of internet plan characteristics, I provide nationwide estimates of demand for internet technologies. I then use these results to estimate a dynamic oligopoly model of private and public internet service providers’ entry and technology adoption decisions, where private firms are driven by profits and municipalities by some (as yet) unknown combination of profits and consumer welfare. Finally, I simulate firms’ actions under a ban on public provision and find evidence that public competition partially, but not completely, crowds out private investment. Ultimately, I find that a ban on municipal provision in 30 states would result in a loss in consumer welfare of $1.11 billion over 20 years.