The Value of Recommendations

We analyze the repeated interaction between a …rm, short-lived consumers, and a monitor that sells recommendations about the …rm to consumers. In each period, the monitor decides whether to recommend the …rm, the current consumer decides whether to purchase the recommendation and whether to buy from the …rm, and the …rm decides whether to exert high e¤ort to provide quality. We show that, in a broad range of settings, the monitor’s desire to maximize the value of its recommendations to consumers is in con‡ict with (constrained) e¢ cient e¤ort provision by the …rm.

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