A Shirking Theory of Referrals
Damien Eldridge ()
No 2007.05, Working Papers from School of Economics, La Trobe University
Many service industries, including the medical and legal professions in some countries, display a gated structure. Rather than approaching a final producer directly, a consumer will first seek a referral from an intermediary. In this paper, we provide one possible explanation for such an industry structure. If the outcome of a transaction depends on producer effort, which is unobservable and unverifiable, then the market may fail to generate a Pareto optimal outcome. This is the standard moral hazard problem. If consumers had a long-run relationship with producers, this type of market failure might be avoided. However, in some industries, consumers will only have a short-run relationship with producers. A gate-keeping intermediary may provide an opportunity for reputation effects to apply in such a setting. By aggregating many potential consumers, gate keeping intermediaries can create an artificial long-run relationship between a consumer and a producer. This long-run relationship reduces the incidence of shirking on the part of the producer.
Keywords: EDIRC; Provider-Institution:; RePEc:edi:smlatau (search for similar items in EconPapers)
Pages: 44 pages
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Working Paper: A shirking theory of referrals (2013)
Working Paper: A Shirking Theory of Referrals (2007)
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