Licensing and Nontransferable Rents
Abstract
Traditionally, restrictive licensing is assumed to create monopoly profits by restricting output, and therefore to produce two kinds of social costs: the deadweight loss due to reduced output and the resources devoted to rent seeking. However, the fact that nonsalvagable resources spent on rent seeking create their own barriers to entry has not been recognized. By increasing nontransferable rents, licensing prevents the least costly producers from entering, and thus produces a third kind of social cost. While Harold Demsetz' (1982) dismissal of the traditional notion of entry barriers is correct when assets are transferable, the idea of entry barriers is still useful when assets are nontransferable, as this note shows in the case of professional licensing.'
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