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Professional service outsourcing, asymmetric information and wage inequality

  • Fuchs, William
  • Garicano, Luis

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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9137.

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Date of creation: Sep 2012
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Handle: RePEc:cpr:ceprdp:9137
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  1. Haas-Wilson, Deborah, 1986. "The Effect of Commercial Practice Restrictions: The Case of Optometry," Journal of Law and Economics, University of Chicago Press, vol. 29(1), pages 165-86, April.
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  7. Luis Garicano & Esteban Rossi-Hansberg, 2005. "Organization and Inequality in a Knowledge Economy," NBER Working Papers 11458, National Bureau of Economic Research, Inc.
  8. Douglas Gale, 2001. "symposium articles: Signaling in markets with two-sided adverse selection," Economic Theory, Springer, vol. 18(2), pages 391-414.
  9. Shapiro, Carl, 1986. "Investment, Moral Hazard, and Occupational Licensing," Review of Economic Studies, Wiley Blackwell, vol. 53(5), pages 843-62, October.
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