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
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
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Working Paper: A Learning Theory of Referrals (2007)
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