The Market for Online Influence

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. We develop parsimonious model which influencers trade off increased revenue they obtain from paid with negative impact that these on their followers’ engagement and, therefore, price receive marketers. The provides testable predictions match suggestive evidence pricing endorsements, reveals novel type inefficiency emerges this market, and clarifies role search technology advice transparency shaping market activity. In particular, we show recent policies make more transparent can backfire, whereas an increase effectiveness matches followers to has both direct strategic positive welfare effects. (JEL D83, L82, L86, M31.)