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Referrals

University of Chicago GSB, Working Paper

50 Pages Posted: 23 Jul 2001  

Luis Garicano

University of Chicago - Booth School of Business - Economics; Centre for Economic Policy Research (CEPR)

Tano Santos

Columbia Business School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: June 13, 2001

Abstract

Specialization requires that workers deal with some valuable opportunities themselves and refer other, possibly unverifiable, opportunities to other workers. How do markets and organizations ensure the matching of opportunities with talent in the presence of informational asymmetries about their value? The cost of providing incentives for effort in this context is that they increase the risk of the agent appropriating an opportunity she should refer upstream. Thus spot markets are severely limited in their ability to support referrals, as they involve very powerful effort incentives on those opportunities kept by the referring agents. We show that partnerships, in which agents agree to share opportunities and the income from the opportunities, appear endogenously as a solution to this problem. Partnership contracts support better communication rules at the expense of biasing effort provision away from first best for all activities. The structure of the contract depends both on the frequency of communications and on the interaction between the relative skill of the agents and the direction of the referral flow.

Keywords: Specialization, Organization, Asymmetric Information,Professional Services, Partnerships, Theory of the Firm

JEL Classification: D2, L2, G3

Suggested Citation

Garicano, Luis and Santos, Tano, Referrals (June 13, 2001). University of Chicago GSB, Working Paper. Available at SSRN: https://ssrn.com/abstract=274928 or http://dx.doi.org/10.2139/ssrn.274928

Luis Garicano (Contact Author)

University of Chicago - Booth School of Business - Economics ( email )

Graduate School of Business
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Centre for Economic Policy Research (CEPR)

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Tano Santos

Columbia Business School ( email )

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National Bureau of Economic Research (NBER)

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