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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)

July 2001

NBER Working Paper No. w8367

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.

Number of Pages in PDF File: 51

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Date posted: July 9, 2001  

Suggested Citation

Garicano, Luis and Santos, Tano, Referrals (July 2001). NBER Working Paper No. w8367. Available at SSRN: https://ssrn.com/abstract=275997

Contact Information

Luis Garicano (Contact Author)
University of Chicago - Booth School of Business - Economics ( email )
Graduate School of Business
1101 East 58th Street
Chicago, IL 60637
United States
773-834-2862 (Phone)
773-702-0458 (Fax)

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Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Tano Santos
Columbia Business School ( email )
3022 Broadway - Uris Hall
Room 815
New York, NY 10027
United States
212-854-0489 (Phone)
212-316-9180 (Fax)

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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