Evaluating a Policy Response to Hidden Actions
A city government is facing a problem where many freelance home repair workers perform low-quality work. Because a customer cannot perfectly monitor a worker's effort and skill during a job (a 'hidden action'), the prevalence of low-quality work imposes a negative external effect on the market: it damages the reputation of all workers and makes it difficult for high-quality workers to signal their value. A city official proposes a simple solution: 'We will implement a mandatory $500 annual licensing fee for all freelance home repair workers. This cost will discourage the less serious, low-quality workers from operating, thereby improving the average quality of service.' Critically evaluate this proposed policy. Will it effectively solve the external effect stemming from the hidden action? Justify your reasoning.
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Social Science
Empirical Science
Science
CORE Econ
Economy
Economics
Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
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