Liberalizing Professional Services: Evidence from Italian Lawyers

This paper presents a new model of occupational licensing, where producers are heterogeneous both in their ability or productivity and in the level of the barriers to entry in the profession that they face. The model bears important implications on the effects of liberalization policies that differ dramatically from those implied by the standard model, where heterogeneity is unidimensional in productivity. Specifically, we find that liberalization policies induce higher quality of services if barriers to entry are high for the most able agents. The opposite if such a correlation is low. We test these implications using detailed microdata on Italian lawyers and find a strong effect of the 2006 Italian liberalizing reform on the composition of the outflows from the legal profession. While higher ability lawyers are more likely to leave the profession before the reform, the opposite happens in its aftermaths, consistently with the idea that monopoly power selects high-productivity lawyers out of the profession.