The value of recommendations

The appendices for this paper are available at the following URL: "http://ssrn.com/abstract=2164774" http://ssrn.com/abstract=2164774Many markets without repeated seller-buyer relations feature third-party "monitors" that sell recommendations. We analyze the profit-maximizing recommendation policies of such monitors. In an infinitely repeated game with seller moral hazard and short-lived consumers, a monopolistic monitor with superior information about the seller's past effort decisions sells recommendations about the seller to consumers. We show that the monitor has an incentive to make its recommendations hard to predict, which in general leads to inefficient effort provision by sellers. These results hold under perfect and imperfect monitoring and in a variety of informational setting. When there are multiple competing sellers, the conflict between the monitor's profit-maximization objective and efficient effort provision is mitigated