Licensing in the Information Age

This past week, Kauffman Foundation Policy Director Jason Wiens released a new Policy Digest on licensing, and its effects on entrepreneurship.  Research Assistant Chris Jackson also has a blog post on the subject over at PDE.  You should read each; both are very good.

Since Jason and Chris covered the topic very thoroughly, I’m going to take two slightly odd angles. 

First, I’m skeptical about the potential impact of licensing reform on innovation.  It’s worth noting that R&D expenditures is not a great, or even necessarily good, measure of innovation.  Nonetheless, most of the industries we’re talking about here have a relatively low ceiling for innovation, or else an innovation curve that looks like a step function with huge space between the rungs.  To fix ideas, let’s look at barbershops.

Barbershop licenses are among the most evidently ridiculous; there is next to no public health or safety reason for the regulation.  The cost to the consumer of a bad haircut should not warrant government intervention, and there is little doubt in my mind that we should do away with them. 

But are we really stifling potential innovation, here?  Beyond setting hair on fire, barbershops haven’t changed all that much over the years.  It seems the main way to go from here is automation, and that is a big step up the innovation ladder; it would be radical, not incremental.  Therefore, we should expect that breakthrough to be pursued by resource-laden firms, which are unlikely to be significantly hindered by a relatively small licensing fee.  By all means, let’s reconsider the need for barbers’ licenses; but let’s not expect a significant boost to society’s total innovative capacity in getting rid of them.

Moving onto the second angle, we might consider how the need for government protection of consumers wanes as the information age continues to ramp up.  Consider the original purpose of licensing – to defeat (or mitigate) problems of asymmetric information.  That is, how do I know ex ante that my surgeon has some degree of proficiency with that scalpel, and won’t do lasting damage to me?  This is a good reason to institute some sort of licensing process. 

Where the stakes are lower, however, we can afford to shake out the worst service providers via the mechanism of a repeated game.  In the information age, each consumer has increasingly greater access to results from previous iterations of the game.  To put it simply: I can go on Yelp! before trying a new barber, and be more certain that I am entering a transaction with (more) perfect information.  This still doesn’t matter for the surgeon, so much, because the first customer can’t be risking life and limb, but decreasing informational frictions render an increasing share of licensing moot.  It may be wise, therefore, to apply to licensing the same sorts of sunset rules we have discussed elsewhere.  What was necessary licensing in the past may not be so today because our access to information about the product or service has drastically improved.

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Jordan Bell-Masterson is an MBA candidate at the University of Chicago.

Previously, Bell-Masterson worked as an analyst in Research and Policy for the Ewing Marion Kauffman Foundation, where he provided support for the department's research programs and initiatives.

He also worked on SEO solutions for Cappex.com, an online college search and matching-engine based in Highland Park, Ill., and served his senior year as station manager for the Grinnell College radio station KDIC 88.5 FM.

Bell-Masterson graduated from Grinnell College in 2012 with a dual BA in English and economics, with honors.