"Referrals"
©
American Economic Review,
June
2004
Volume: 94
|
Issue: 3
|
Pages: 499-525
Publication type: Journal article
Research Archive Topic: Business Economics and Public Policy, Corporate Finance, Organizations
Abstract
This paper studies the matching of opportunities with talent when costly diagnosis confers an informational advantage to the agent undertaking it. When this agent is underqualified, adverse selection prevents efficient referrals through fixed-price contracts. Spot-market contracts that rely on income sharing can match opportunities with talent but induce a team-production problem which, if severe enough, can prevent the referral of valuable opportunities. Partnership contracts, in which agents agree in advance to the allocation of opportunities and of the revenues they generate, support referrals where the market cannot, but often at the expense of distortions on those opportunities that are not referred.
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