Recommendations with Feedback
Summary
When a recommender's choices affect which product ends up being best, recommendations become self-fulfilling: the recommender can make almost any firm the winner. This can leave too little incentive to gather information, a bias toward the status quo, and avoidance of risky innovations; payments from firms can help, while competition among recommenders and payments from consumers do not.
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-fulfilling property: the recommendation agent can select any firm which will end up being the firm with the best quality. Recommendations can lead to significant inefficiencies which include: i) a lack of incentive to acquire valuable information, ii) a status quo bias, and iii) the avoidance of risky innovations. Direct monetary payments from firms may work in mitigating these inefficiencies, while competition between recommenders and monetary transfers from consumers are ineffective.
How to cite
Iyer, Ganesh and Gustavo Manso (2023). Recommendations with Feedback. Review of Financial Studies 36, 501–533.
@article{iyer2023recommendations,
author = {Iyer, Ganesh and Manso, Gustavo},
title = {Recommendations with Feedback},
journal = {Review of Financial Studies},
volume = {36},
number = {2},
pages = {501–533},
year = {2023},
doi = {10.1093/rfs/hhac019}
}