Sorting, Reputation and Entry in a Market for Experts

59 Pages Posted: 11 May 2010

Date Written: October 16, 2009

Abstract

This paper analyses the market for professional (expert) services where the experts are motivated by reputational concerns. A key feature of such markets, which is often overlooked, is that clients can have specific characteristics that affect their evaluation of the service, and (or) the likelihood the service can be provided successfully. These different characteristics can induce clients to choose between experts with different reputations. The paper shows that clients choices have an important impact on the incentives of experts to provide a high quality service. In particular, sorting of clients affects incentives through three channels: changes in the types of client who are indifferent between getting the service from experts of different reputation, changes in the information on good performance as a signal of an expert's talent, and changes in the average complexity of the service the expert provides which impacts on the marginal efficiency of effort. The paper also investigates under what conditions increased entry of experts increases their incentives to exert effort. The results of the model can be applied to examine the effects of entry into the markets for doctors, lawyers, professional consultancies.

Keywords: reputation, competition, sorting, experts, entry

JEL Classification: D82, L15, L84

Suggested Citation

Sette, Enrico, Sorting, Reputation and Entry in a Market for Experts (October 16, 2009). Bank of Italy Temi di Discussione, Working Paper No. 727, Available at SSRN: https://ssrn.com/abstract=1601826 or http://dx.doi.org/10.2139/ssrn.1601826

Enrico Sette (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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