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Are Occupational Licenses Needed in a Digitized World?

May 09, 2016

Professor Brynjolfsson (MIT IDE), Professor Chiara Farronato (Harvard Business School), Dr. Andrey Fradkin (MIT IDE), and Professor Bradley Larsen (Stanford)

The inability to verify the quality of a service provider represents a major challenge to the functioning of markets. One traditional solution to this problem is for the government to regulate services through certification or mandatory licensing. These regulations are meant to ensure that consumers receive quality service by excluding unqualified sellers. However, occupational licenses also have the potential drawbacks of raising the prices consumers face and rationing workers out of the market. Furthermore, although there are over 800 licensed occupations, little is known about the efficacy of licenses in raising the level of service. At the same time, digital reputation systems provide an alternative way for consumers to match the service providers. These reputation systems aggregate high-frequency information about the quality of a service and use it to help consumers match with appropriate service providers. In this paper, we use data from, a large online marketplace for professional services, to study how licensing affects market outcomes, how licensing compares to online reviews, and whether consumers value licensing information. Thumbtack is the perfect environment for studying these questions because consumers are able to see the reviews and licensing information of bidding service providers. Therefore, we can use this data to measure whether more stringent licensing leads to higher quality services and how consumers value licenses and online reviews.