Professional service outsourcing, asymmetric information and wage inequality

Luis Garicano and William Fuchs

No 9137, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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.

Keywords: Inequality; Knowledge markets; Organization (search for similar items in EconPapers)
JEL-codes: D82 D83 (search for similar items in EconPapers)
Date: 2012-09
New Economics Papers: this item is included in nep-cta
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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