Professional Service Outsourcing, Asymmetric Information and Wage Inequality

44 Pages Posted: 28 Sep 2012

See all articles by William Fuchs

William Fuchs

University of Texas at Austin - Department of Finance; Universidad Carlos III de Madrid - Department of Economics

Luis Garicano

Centre for Economic Policy Research (CEPR); IE Business School

Date Written: September 2012

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

JEL Classification: D82, D83

Suggested Citation

Fuchs, William Martin and Garicano, Luis and Garicano, Luis, Professional Service Outsourcing, Asymmetric Information and Wage Inequality (September 2012). CEPR Discussion Paper No. DP9137, Available at SSRN: https://ssrn.com/abstract=2153578

William Martin Fuchs (Contact Author)

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

Universidad Carlos III de Madrid - Department of Economics ( email )

Calle Madrid 126
Getafe, 28903
Spain

Luis Garicano

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IE Business School ( email )

Calle María de Molina, 11
Madrid, 28006
Spain

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