Investment, Moral Hazard, and Occupational Licensing

Abstract

I analyse occupational licensing as an input regulation that requires minimum levels of human capital investment by professionals. By raising professionals' training levels, licensing helps alleviate moral hazard problems associated with the provision of high quality services. I also consider certification, whereby consumers are provided information about professionals' training levels. I show that licensing and certification tend to benefit consumers who value quality highly at the expense of those who do not. Licensing may raise total surplus if sellers' investments are not observable, but is Pareto-worsening if training levels are observable. Certification may, however, lead to excessive investment as a signalling device, and thus be Pareto Inferior to either licensing or to a policy of laissez-faire.