A Learning Theory of Referrals
La Trobe University School of Business Discussion Paper No. A07.06
29 Pages Posted: 12 Mar 2009
Date Written: November 1, 2007
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 producer's 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.
Keywords: Adverse Selection, Gatekeepers, Indirect Reputation, Learning, Referral
JEL Classification: C72, C73, D49, D82, I11, L14, L80, L84
Suggested Citation: Suggested Citation