A Learning Theory of Referrals

La Trobe University School of Business Discussion Paper No. A07.06

29 Pages Posted: 12 Mar 2009

See all articles by Damien Eldridge

Damien Eldridge

La Trobe University School of Economics

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

Eldridge, Damien Sean, A Learning Theory of Referrals (November 1, 2007). La Trobe University School of Business Discussion Paper No. A07.06, Available at SSRN: https://ssrn.com/abstract=1358031 or http://dx.doi.org/10.2139/ssrn.1358031

Damien Sean Eldridge (Contact Author)

La Trobe University School of Economics ( email )

School of Economics
La Trobe University
Melbourne, Victoria, 3086
Australia

HOME PAGE: http://www.latrobe.edu.au/economics/about/staff/profile?uname=deldridge

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