More stringent licensing regulations are associated with less competition and higher prices but not with any improvement in customer satisfaction

See Consumer Protection in an Online World: An Analysis of Occupational Licensing by Chiara Farronato, Andrey Fradkin, Bradley Larsen and Erik Brynjolfsson.

NBER Working Paper No. 26601
Issued in January 2020

 
NBER Program(s):Industrial Organization Program, Law and Economics Program, Labor Studies Program, Productivity, Innovation, and Entrepreneurship Program

 

We study the effects of occupational licensing on consumer choices and market outcomes in a large online platform for residential home services. We exploit exogenous variation in the time at which licenses are displayed on the platform to identify the causal effects of licensing information on consumer choices. We find that the platform-verified licensing status of a professional is unimportant for consumer decisions relative to review ratings and prices. We confirm this result in an independent consumer survey. We also use variation in regulation stringency across states and occupations to measure the effects of licensing on aggregate market outcomes on the platform. Our results show that more stringent licensing regulations are associated with less competition and higher prices but not with any improvement in customer satisfaction as measured by review ratings or the propensity to use the platform again.