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Can Consumers Detect Lemons? Information Asymmetry in the Market for Child Care

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  • H. Naci Mocan

Abstract

This paper applies direct tests for adverse selection and moral hazard in the market for child care. A unique data set containing quality measures of various characteristics of child care provided by 746 rooms in 400 centers, as well as the evaluation of the same attributes by 3,490 affiliated consumers (parents) is employed. Comparisons of consumer evaluations of quality to actual quality show that, after adjusting for scale effects, parents are weakly rational. The hypothesis of strong rationality is rejected, indicating that parents do not utilize all available information in forming their assessment of quality. Parent characteristics impact the accuracy of their evaluations. An analysis of easy-to-observe versus difficult-to-observe aspects of quality reveals that parents are trying to extract signals more heavily in cases of difficult-to-observe items. A comparison of parent assessments to results obtained from standard quality production functions reveals that, for the most part, parents interpret the signals incorrectly. The results demonstrate the existence of information asymmetry and adverse selection in the market. There is some limited evidence for moral hazard as nonprofit centers with very clean reception areas tend to produce lower level of quality for unobservable items. These results provide an explanation for low average quality in the child care market.

Suggested Citation

  • H. Naci Mocan, 2001. "Can Consumers Detect Lemons? Information Asymmetry in the Market for Child Care," NBER Working Papers 8291, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:8291
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    1. Feenberg, Daniel R, et al, 1989. "Testing the Rationality of State Revenue Forecasts," The Review of Economics and Statistics, MIT Press, vol. 71(2), pages 300-308, May.
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    Cited by:

    1. V. Joseph Hotz & Mo Xiao, 2005. "The Impact of Minimum Quality Standards on Firm Entry, Exit and Product Quality: The Case of the Child Care Market," Working Papers 05-28, Center for Economic Studies, U.S. Census Bureau.
    2. Blau, David & Currie, Janet, 2006. "Pre-School, Day Care, and After-School Care: Who's Minding the Kids?," Handbook of the Economics of Education, Elsevier.
    3. Blau, David M., 2007. "Unintended consequences of child care regulations," Labour Economics, Elsevier, vol. 14(3), pages 513-538, June.
    4. Xiao, Mo, 2010. "Is quality accreditation effective? Evidence from the childcare market," International Journal of Industrial Organization, Elsevier, vol. 28(6), pages 708-721, November.
    5. Joëlle Noailly & Sabine Visser & Paul Grout, 2007. "The impact of market forces on the provision of childcare: Insights from the 2005 Childcare Act in the Netherlands," CPB Memorandum 176, CPB Netherlands Bureau for Economic Policy Analysis.
    6. Colm Harmon & Claire Finn & Arnaud Chevalier & Tarja Viitanen, 2006. "The economics of early childhood care and education : technical research paper for the National Economic and Social Forum," Open Access publications 10197/671, School of Economics, University College Dublin.
    7. V. Joseph Hotz & Mo Xiao, 2011. "The Impact of Regulations on the Supply and Quality of Care in Child Care Markets," American Economic Review, American Economic Association, vol. 101(5), pages 1775-1805, August.
    8. Guyonne Kalb, 2009. "Children, Labour Supply and Child Care: Challenges for Empirical Analysis," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 42(3), pages 276-299.

    More about this item

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • J1 - Labor and Demographic Economics - - Demographic Economics

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