We conclude that publicly or privately supported information provision can have beneficial effects. Most directly, information provision lowers consumer search costs. Both our theoretical and empirical work indicate that information provision can reduce price dispersion without eroding an important measure of observable quality.
The outline of the paper follows. In the next section, we describe important features of child care markets. In section 3, we develop our theoretical model, and in Section 4, we describe our data and empirical methodology. Section 5 contains a discussion of the impact of R&Rs and other factors on the distribution of market prices. Section 6 contains a discussion of the impact of R&Rs on the distribution of staff-child ratios. The final section contains our summary and conclusions.
The Market for Child Care
Unique features of child care markets allow us to examine the effects of information provision.6 These markets are very localized, because parents overwhelmingly prefer to have their children cared for in their own residential neighborhood (Maryland Committee for Children, 1996; Queralt and Witte, forthcoming). Care providers compete in both price and costly quality. Families incur substantial search costs to learn the prices and care characteristics of providers.
Beginning in the late 1960s, various grassroots community organizations in higher income, better educated areas began collecting information on child care prices and measurable aspects of child care quality (e.g. staff/child ratios). These groups, typically called Information and Referral agencies, made this information available to parents either free of charge or for a small fee. As the importance of female workers increased during the 1970s, many corporations became interested in helping their employees obtain child care. By the late 1970s and 1980s, corporations began to actively engage in expanding the availability of child care and to retain the services of the Information and Referral agencies to assist their employees. By the end of the 1980s, Resource and Referral agencies (R&Rs), as they came to be called, had spread widely. In 1990, the year of our data, over half of local areas in the U.S. had R&Rs. Descriptive statistics in Table 1(a) show that in 1990, R&Rs were still most common in higher income and better educated areas.