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A Learning Theory of Referrals

Damien Eldridge ()

No 2007.06 EDIRC Provider-Institution: RePEc:edi:smlatau, Working Papers from School of Economics, La Trobe University

Abstract: 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. Such an industry structure might help to alleviate adverse selection problems between parties that interact infrequently. Intermediaries aggregate many short-run transactions between various consumers and a particular producer. As such, they might be able to learn a producers level of proficiency more rapidly than an individual consumer. However, the presence of a positive information externality means that too few consumers will seek a referral. As such, some form of regulation to encourage consumers to seek a referral might be warranted.

Pages: 29 pages
Date: 2007-11
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