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Sorting, reputation and entry in a market for experts

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  • Enrico Sette

    ()
    (Bank of Italy)

Abstract

This paper analyses the market for professional (expert) services where the experts are motivated by reputational concerns. A key feature of such markets, which is often overlooked, is that clients can have specific characteristics that affect their evaluation of the service, and (or) the likelihood the service can be provided successfully. These different characteristics can induce clients to choose between experts with different reputations. The paper shows that clients choices have an important impact on the incentives of experts to provide a high quality service. In particular, sorting of clients affects incentives through three channels: changes in the types of client who are indifferent between getting the service from experts of different reputation, changes in the information on good performance as a signal of an expert's talent, and changes in the average complexity of the service the expert provides which impacts on the marginal efficiency of effort. The paper also investigates under what conditions increased entry of experts increases their incentives to exert effort. The results of the model can be applied to examine the effects of entry into the markets for doctors, lawyers, professional consultancies.

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File URL: http://www.bancaditalia.it/pubblicazioni/econo/temidi/td09/td727_09/en_td_727_09/en_tema_727.pdf
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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 727.

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Date of creation: Aug 2009
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Handle: RePEc:bdi:wptemi:td_

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Keywords: reputation; competition; sorting; experts; entry;

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  1. Bar-Isaac, Heski, 2005. "Imperfect competition and reputational commitment," Economics Letters, Elsevier, vol. 89(2), pages 167-173, November.
  2. Costa, Luis Almeida e & Vasconcelos, Luis, 2008. "Share the Fame or Share the Blame? The Reputational Implications of Partnerships," FEUNL Working Paper Series wp539, Universidade Nova de Lisboa, Faculdade de Economia.
  3. Faure-Grimaud, Antoine & Peyrache, Eloïc & Quesada, Lucía, 2005. "The Ownership of Ratings," CEPR Discussion Papers 5432, C.E.P.R. Discussion Papers.
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