A Shirking Theory of Referrals

La Trobe University School of Business Discussion Paper Number A07.05, La Trobe University, Bundoora, Victoria, Australia.

44 Pages Posted: 12 Mar 2009

See all articles by Damien Eldridge

Damien Eldridge

La Trobe University School of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: November 1, 2007

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. In this paper, we provide one possible explanation for such an industry structure. If the outcome of a transaction depends on producer effort, which is unobservable and unverifiable, then the market may fail to generate a Pareto optimal outcome. This is the standard moral hazard problem. If consumers had a long-run relationship with producers, this type of market failure might be avoided. However, in some industries, consumers will only have a short-run relationship with producers. A gatekeeping intermediary may provide an opportunity for reputation effects to apply in such a setting. By aggregating many potential consumers, gate keeping intermediaries can create an artificial long-run relationship between a consumer and a producer. This long-run relationship reduces the incidence of shirking on the part of the producer.

Keywords: Gatekeepers, Indirect Reputation, Moral Hazard, Referral, Shirking

JEL Classification: C72, C73, D49, D82, I11, L14, L80, L84

Suggested Citation

Eldridge, Damien Sean, A Shirking Theory of Referrals (November 1, 2007). La Trobe University School of Business Discussion Paper Number A07.05, La Trobe University, Bundoora, Victoria, Australia., Available at SSRN: https://ssrn.com/abstract=1358009 or http://dx.doi.org/10.2139/ssrn.1358009

Damien Sean Eldridge (Contact Author)

La Trobe University School of Economics ( email )

School of Economics
La Trobe University
Melbourne, Victoria, 3086
Australia

HOME PAGE: http://www.latrobe.edu.au/economics/about/staff/profile?uname=deldridge

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