Abstract
Abstract We investigate the strategic role of a recommender who cares about accuracy and whose recommendations influence product quality. In the presence of such feedback effects, recommendations have a self-fulling property: the recommendation agent can select any firm that will end up being the firm with the best quality. This produces important inefficiencies that include (a) a lack of incentive to acquire valuable information, (b) a status quo bias, and (c) the avoidance of risky innovations. Monetary payments from firms may work in mitigating these inefficiencies, while competition between recommenders and monetary payments from consumers are ineffective.
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