Can consumers detect lemons? An empirical analysis of information asymmetry
in the market for child care
Journal of Population Economics, October 2007, Pages 743-78
(older version, SSRN)
This paper tests adverse selection in the market for child care. A unique
data set containing quality measures of various characteristics of child
care provided by 746 rooms in 400 centers, as well as the evaluation of the
same attributes by 3,490 affiliated consumers (parents) in the U.S., is
employed. Comparisons of consumer evaluations of quality to actual quality
show that after adjusting for scale effects, parents are weakly rational.
The hypothesis of strong rationality is rejected, indicating that parents do
not utilize all available information in forming their assessment of
quality. The results demonstrate the existence of information asymmetry and
adverse selection in the market, which provide an explanation for low
average quality in the U.S. child care market.
So, a question: I can see the lemons thing. Pedophiles will work in day care centers more cheaply than the rest of us. Lazy people will take jobs as day care
providers, because it seems easy. Something like that.
But, parents are desperate for high quality, low cost day care. Why aren't there more chains? Reputation should solve this problem, at least in part. CarMax has largely solved the problem in used cars. Of course, CarMax doesn't just rely on reputation; they also offer a very good warrantee.
(Big nod ups to KL)