The Market for Influence

Abstract

Recent developments in social media have morphed the age-old practice of paying influential individuals for product endorsements into a multibillion-dollar industry, extending well beyond celebrity sponsorships. In our model, influencers trade off the increased revenue they obtain from paid endorsements with the negative impact that these have on their followers' engagement and, therefore, on the price influencers receive from marketers. The model clarifies the role of key parameters like search quality and advice transparency in shaping market activity. Recent policies that make paid endorsements more transparent can backfire. In contrast, an increase in the effectiveness of the search technology that matches followers to influencers has unambiguous positive welfare effects.