"...in states with more restrictive licensing laws for dentists, dental health is no higher than in states with less restrictive laws, but dental prices are.

For decades, economists have debated the effects of occupational licensing on the well-being of consumers. On the one hand, as Milton Friedman and Simon Kuznets pointed out in a famous 1945 NBER study, restrictive licensing of a profession reduces the supply, which necessarily raises the price. Thus, in their view, occupational licensing hurts consumers. Yet, other economists pointed out later that licensing may keep out the lowest-quality practitioners, so that consumers, assured of higher quality, may respond by demanding more service. Therefore the net effect on output and consumer well-being was thought to be ambiguous. Most of the discussion was abstract, though, and the little evidence presented on this issue was weak.

Now an NBER study by Morris Kleiner and Robert Kudrle finds that in states with more restrictive licensing laws for dentists, dental health is no higher than in states with less restrictive laws, but dental prices are. In Does Regulation Improve Outputs and Increase Prices?: The Case of Dentistry (NBER Working Paper No. 5869), the authors' measure of the restrictiveness of state licensing requirements is based on two factors. The first is the pass rate on the states' dental licensing exams, which averages about 85 percent nationwide. The lower the pass rate, all other things equal, the more restrictive is the state licensing. The second factor is whether state licensing boards give reciprocity or endorsement to dentists from other states. Under reciprocity, the licensing board in one state allows dentists licensed in another state to practice if the reverse is true (that is, there is reciprocity). Under endorsement, one state allows dentists licensed in any other state to practice there.

States with pass rates below 80 percent and either no reciprocity or no endorsement provision are classified as "heavily regulated." States with pass rates between 80 and 90 percent and a provision for reciprocity or endorsement are "medium regulated". States with pass rates above 90 percent and either reciprocity or endorsement are "low regulation" states.

Kleiner and Kudrle then use data on the dental health of young Air Force recruits, along with information on each state where they had lived, to estimate the effect on their dental health of more restrictive licensing. The researchers find no effect on dental health, but an effect on prices.

If a state were to change from a low level of restrictiveness to the highest level, the researchers find, the price of dental services would rise by 14 to 16 percent. They also find that, all else equal, the incomes of dentists in a state with high regulation exceed the incomes of dentists in low-regulation states by 10 percent.

The Digest is not copyrighted and may be reproduced freely with appropriate attribution of source.

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