Studies examining the relationship between licensing and service quality date back to the 1970s and cover occupations including physicians, 1
nurse practitioners, 2
tour guides, 5
massage therapists 6
and many others. The results have been mixed, but most studies have found licensing to share either no relationship or a mixed relationship with service quality. Appendix C lists relevant studies since the 1970s and shows what relationship, if any, they found between licensing and quality.
Of those studies, the most relevant to the occupations we analyzed are four examining general services (florists and tour guides), home improvement services, and personal care services (barbers, cosmetologists, manicurists and massage therapists). These studies provide some indication of what we might expect to find in our own analyses.
Three of the four studies suggest licensing has no effect on service quality. The first is another Institute for Justice study. It used a field experiment to examine whether Louisiana’s florist license resulted in better floral arrangements. 7
For the experiment, IJ procured arrangements from licensed Louisiana florists and unlicensed Texas florists. We then asked judges—randomly selected florists from both states who possessed no knowledge of the study’s purpose—to score them. The results showed no difference in quality between the states.
The second study, also from IJ, used a measure of quality similar to the one we use here—consumer reviews. 8
Exploiting a change in a licensing law, the research compared Tripadvisor reviews of tour guides in the District of Columbia before and after the city repealed its mandatory licensing exam. The results showed no significant difference in quality after the exam requirement ended.
The third study used consumer hiring decisions to examine licensing and perceived service quality in home improvement occupations (e.g., painters and interior designers). 9
Using data from an online platform that allows consumers to find home improvement service providers, the study measured quality based on whether a consumer hired a tradesperson for a job. The platform does not require service providers to provide proof of licensure, but consumers can use the platform to verify licensure. Exploiting this verification tool, the study compared (1) the number of consumers who hired a provider after verifying their license to (2) the number of consumers who hired a provider without verifying their license. If licensure really mattered to consumers, it would be reasonable to expect more consumers to hire service providers after verifying their license. Yet this was not the case—licensure appeared to play no significant role in consumers’ hiring decisions. The study did, however, find that positive reviews had a significant influence on consumers’ decisions. The researchers conducted an independent survey of recent consumers of home improvement services, which confirmed both findings. When the researchers asked consumers to list up to three reasons why they selected a particular service provider, 13% mentioned reviews, while less than 1% mentioned licensing.
Like the first three studies, the fourth found licensing did not increase quality overall. 10
But unlike those studies, it found licensing actually had a negative effect on quality. The study used the same measure of quality as our analyses here—consumer Yelp ratings—and examined whether more stringent licensing requirements (fees, minimum education and experience, minimum age, minimum grade, and exams) produced greater service quality for barbers, cosmetologists, manicurists and massage therapists, in a combined model. The effects of the burdens of licensing requirements for each occupation were considered, along with whether licensing or an individual requirement type was required at all. Requiring education and experience, exams, or any licensing at all reduced quality as measured by ratings. Requiring any fees or minimum grade was weakly negative on quality, while requiring a minimum age was not significant. Overall, requiring licensing reduced Yelp ratings. 11
Thus, among occupations similar to those we studied, licensing and service quality more often appear unrelated, whether quality is measured by practitioners, consumer reviews or consumer hiring decisions. To the extent there is a relationship, licensing appears to produce lower service quality. These earlier studies suggest that, in our analyses of states with and without licensing or with more stringent and less stringent licensing requirements, we might find no difference in Yelp ratings across states and perhaps even lower quality in states with stricter requirements. Such results would contradict licensing proponents’ claims.