Licensing with skill acquisition

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Licensing is often viewed as a tool to enforce guild-like practices and restrict access to certain professions. I consider an activity that requires a license because it causes an externality. When individuals cannot increase their competency beyond their intrinsic ability, social welfare is maximized by a licensing standard that sorts individuals optimally. But when individuals can acquire skill to increase their competency, I show that any licensing standard that increases social welfare must be higher than the one that sorts individuals optimally conditional on their competency. In this sense, standards that are higher than what ex-post optimal sorting prescribes are often socially optimal and are not necessarily indicative of guild-like practices.

Original languageEnglish (US)
Article number109456
JournalEconomics Letters
StatePublished - Oct 2020

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics


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