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A Learning Theory of Referrals

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  • Damien S Eldridge

    ()
    (Department of Economics and Finance, La Trobe University)

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 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.

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File URL: http://www.latrobe.edu.au/__data/assets/pdf_file/0018/130905/2007.06.pdf
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Bibliographic Info

Paper provided by School of Economics, La Trobe University in its series Working Papers with number 2007.06 EDIRC Provider-Institution: RePEc:edi:smlatau.

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Length: 29 pages
Date of creation: Nov 2007
Date of revision:
Handle: RePEc:ltr:wpaper:2007.06

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  1. Spence, A Michael, 1973. "Job Market Signaling," The Quarterly Journal of Economics, MIT Press, vol. 87(3), pages 355-74, August.
  2. Jeffrey C. Ely & Johannes Horner & Wojciech Olszewski, 2003. "Belief-free Equilibria in Repeated Games," Levine's Working Paper Archive 666156000000000367, David K. Levine.
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  8. Macho-Stadler, Ines & Perez-Castrillo, J. David, 2001. "An Introduction to the Economics of Information: Incentives and Contracts," OUP Catalogue, Oxford University Press, edition 2, number 9780199243273, October.
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  16. Riley, John G, 1979. "Informational Equilibrium," Econometrica, Econometric Society, vol. 47(2), pages 331-59, March.
  17. Damien S.Eldridge, 2013. "A shirking theory of referrals," Working Papers 2013.01, School of Economics, La Trobe University.
  18. Damien S Eldridge, 2007. "A Learning Theory of Referrals," Working Papers 2007.06, School of Economics, La Trobe University.
  19. John G. Riley, 2001. "Silver Signals: Twenty-Five Years of Screening and Signaling," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 432-478, June.
  20. Stiglitz, Joseph E, 1977. "Monopoly, Non-linear Pricing and Imperfect Information: The Insurance Market," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 407-30, October.
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Cited by:
  1. Damien S Eldridge, 2007. "A Shirking Theory of Referrals," Working Papers 2007.05, School of Economics, La Trobe University.
  2. Damien S Eldridge, 2007. "A Learning Theory of Referrals," Working Papers 2007.06, School of Economics, La Trobe University.

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