A note on the optimal scope of professional self-regulation

Abstract Professions such as doctors and lawyers often enjoy some degree of self-regulation, i.e. they can set the codes of conduct in the market and even determine the rules for joining the profession. We address the problem of the optimal scope of self-regulation. Specifically, we model a profession that can decide about the quality of the service, and we examine if the profession should also be allowed to determine the number of suppliers. We assume that a larger number of professionals reduce the fixed cost of providing quality, and hence the motive to restrict entry is mitigated. Nonetheless, we find that for well-behaved fixed costs functions, the size of the profession preferred by the professionals is smaller than the socially optimal one. Still, if the only alternative to self-regulation is free entry to the profession, then self-regulation is the preferable regime. These findings are relevant for the services that are difficult to substitute by the services produced outside the profession.