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A Learning Theory of Referrals

  • Damien S Eldridge


    (Department of Economics and Finance, La Trobe University)

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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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
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Handle: RePEc:ltr:wpaper:2007.06
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  3. Damien S Eldridge, 2007. "A Learning Theory of Referrals," Working Papers 2007.06, School of Economics, La Trobe University.
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  9. Damien S.Eldridge, 2013. "A shirking theory of referrals," Working Papers 2013.01, School of Economics, La Trobe University.
  10. Pauly, Mark V, 1974. "Overinsurance and Public Provision of Insurance: The Roles of Moral Hazard and Adverse Selection," The Quarterly Journal of Economics, MIT Press, vol. 88(1), pages 44-62, February.
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