Lemons Models of Professional Labor Markets Reconsidered

This paper examines the nature of equilibrium in professional service markets where consumers are heterogeneous and practitioners are quality-differentiated. The paper first develops models for the cases in which consumers can and cannot observe the quality of any practitioner. Noting that unobservable quality is a likely characteristic of professional labor markets, the paper then compares the equilibrium outcomes in a pure lemons model with those under symmetric information. The existence of adverse selection in the equilibrium is shown to depend both on the demand structure as well as the supply structure. It is also observed that conventional lemons models are not consistent with characteristics of the professional service markets. Finally, the paper argues that the standard theory which views occupational licensure as a solution to the adverse selection problem loses much of its validity in the long run.