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A Learning Theory of Referrals

Author

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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.

Suggested Citation

  • Damien S Eldridge, 2007. "A Learning Theory of Referrals," Working Papers 2007.06 EDIRC Provider-In, School of Economics, La Trobe University.
    • Handle: RePEc:ltr:wpaper:2007.06
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    File URL: http://www.latrobe.edu.au/__data/assets/pdf_file/0018/130905/2007.06.pdf
    File Function: First version, 2007.06.pdf
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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 EDIRC Provider-In, School of Economics, La Trobe University.

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