Working Paper: CEPR ID: DP9137
Authors: William Fuchs; Luis Garicano
Abstract: The economy is experiencing a large shift towards professional services. Markets for these services are characterized by large information asymmetries: the difficulty in providing the necessary advice, the quality of the advice, and whether a problem is solved may all be unobservable. Our analysis considers these markets in a general equilibrium setting, which allows us to address the selection of talent into occupations and their efficiency and distributional implications. We first show that reductions in communications costs allow these markets to appear and increase wage inequality, as they favor the most skilled agents. However, under asymmetric information these markets are unable to exclude the least talented from posing as experts. If contingent contracts cannot be written, the market collapses and no services are bought or sold. If output contingent contracts are feasible, market exchanges weakly involve excessive trade. Despite the asymmetric information efficiency can be attainable when experts can solve many problems. Even when the allocation is efficient, the asymmetry of information has distributional consequences. It benefits moderately skilled agents at the expense of the least talented and most talented ones.
Keywords: inequality; knowledge markets; organization
JEL Codes: D82; D83
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| reductions in communication costs (L96) | emergence of professional service markets (L84) |
| emergence of professional service markets (L84) | increase in wage inequality (J31) |
| reductions in communication costs (L96) | increase in wage inequality (J31) |
| inability to create contracts (D86) | market collapse (G10) |
| market collapse (G10) | no services exchanged (H49) |
| output-contingent contracts feasible (D86) | excessive trade (F10) |
| agent skill levels (L85) | economic outcomes in the market (F61) |