Study: Consumers care more about reputation than licensing

While most of us wouldn’t argue that some occupations in the medical field shouldn’t be regulated in some way, one of the arguments that I often make when engaged in discussions about the need for occupational licensing is that in the 21st century, the more important consumer standard for whether you use a particular service isn’t licensure, but online recommendations. When testifying before a committee a couple of years ago, I set my cell phone down on the table, and then held it up and told the senators that if I wanted to find a good hair salon, or a good plumber, I’d do a Google search, and would look at ratings, and might even look at the Yelp ratings, as well. Licensure for exchange of services that are primarily cash in nature may be way overrated.

A few years ago, one of our hot water heaters went out. Our home–which we built in 2002–is like everyone else’s: you need to replace things, and do ongoing maintenance. So, when our hot water heater went out, we called the plumbing/HVAC business down the road who had been the contractor when we built the house, and who had sent an HVAC technician twice a year to our house to do preventive maintenance on that system. We were happy with the company, we’d always gotten good service from that business at a fair price, and we wanted to continue to give them business.

But alas, they had recently lost their sole “master plumber” and the building code in our community required that a master plumber be present if any water heater was installed by a plumbing company. Hmm. OK. When I called the city offices to ask what local plumbing companies had a “master plumber” working for them, everyone listed was primarily engaged in the sprinkler/irrigation business, and to find a company who could install our [electric, not gas] hot water heater, I’d have to pay someone from Lincoln to make the trip. Fortunately, I have a husband who is pretty handy, and not afraid to do simple DIY projects. He ordered a water heater, and installed it himself!

The point, of course, is that I would have been quite happy to pay someone else to do the work–a company that had done, and could do, a lot of plumbing projects (I was told they could re-pipe my kitchen if I wanted them to, but couldn’t put in the water heater!), that my experience had shown was more than competent, and if it was something that my non-plumber-DIY-competent husband could do, that maybe having a master plumber’s license was less important than that good reputation.

A recent study, conducted jointly by MIT, Stanford, Harvard and Boston University researchers  reported in the Stanford News proves much of my point:

“Consumers tend to heavily value prices and online reputation, but not the licensing status of professionals when they’re picking whom to hire,” said Larsen, an assistant professor of economics and faculty fellow at the Stanford Institute for Economic Policy Research (SIEPR). “This is suggestive that we should take a much closer look at licensing laws to make sure they are working as intended, and to be sure the benefits outweigh the costs.”

As the Stanford report notes:

The researchers found that when consumers using the online platform hired a professional, they were, on average, more likely to choose providers who had more reviews, higher ratings and lower bidding prices. The team also studied what happened when a service provider’s licensing status got verified by the platform and posted onto the provider’s online profile. Because those updates happened at random times, the researchers were able to unearth a causal effect, not just a correlation. The result: The licensing status essentially made no difference in hiring decisions.

“In almost every specification we tested, we found no effect of licensing. Consumers did not appear to care at all,” Larsen said.

While I’m obviously happy that the examples I provided several years ago have been verified through academic study, what’s more important for policymakers to note is that licensing is probably providing little or no benefit identifiable by consumers in the 21st century–at least not in many occupational areas.  This should empower lawmakers and those interested in policy to continue to look at ways for reducing the barriers that licensing create for people to live their dreams and earn a living.