Working Paper: NBER ID: w23696
Authors: Jonathan B. Berk; Jules H. Van Binsbergen
Abstract: We model a market for a skill that is in short supply and high demand, where the presence of charlatans (professionals who sell a service that they do not deliver on) is an equilibrium outcome. We use this model to evaluate the standards and disclosure requirements that exist in these markets. We show that reducing the number of charlatans through regulation decreases consumer surplus. Although both standards and disclosure drive charlatans out of the market, consumers are worse off because of the resulting reduction in competition amongst producers. Producers, on the other hand, strictly benefit from the regulation, implying that the regulation we observe in these markets likely derives from producer interests. Using these insights, we study the factors that drive the cross-sectional variation in charlatans across professions. Professions with weak trade groups, skills in larger supply, shorter training periods and less informative signals regarding the professional's skill, are more likely to feature charlatans.
Keywords: regulation; charlatans; high-skill professions; consumer surplus; producer interests
JEL Codes: D11; D18; G18; K2; K22; K23; L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| regulation (L51) | number of charlatans (Z13) |
| number of charlatans (Z13) | prices (P22) |
| prices (P22) | consumer surplus (D46) |
| regulation (L51) | prices (P22) |
| regulation (L51) | consumer surplus (D46) |
| regulation (L51) | competition among producers (L11) |
| competition among producers (L11) | prices (P22) |
| regulation (L51) | expected wage of skilled workers (J31) |
| expected wage of skilled workers (J31) | producer welfare (J54) |