REFERRALS

This paper studies the matching of opportunities with talent when costly diagnosisconfers an informational advantage to the agent undertaking it. When this agentis under-qualified, adverse selection prevents efficient referrals through fixed-pricecontracts. Spot-market contracts that rely on income sharing can match opportunitieswith talent but induce a team-production problem which, if severe enough,can prevent the referral of valuable opportunities. Partnership contracts, in whichagents agree in advance to the allocation of opportunities and of the revenues theygenerate, support referrals where the market cannot, but often at the expense ofdistortions on those opportunities that are not referred.[...]