Social Connectedness and the Market for Information

This paper introduces a simple model of contemporary information markets: Consumers prefer high-quality information, judiciously sharing stories and posts. High-quality stories are costly to produce, and overall quality is endogenous. When producers’ payoffs derive from how many consumers see their stories, quality is highest when social connectedness is neither too high nor too low. In highly-connected markets, low-quality stories are widely seen and dominate. Third-party misinformation can increase high-quality output, since consumers share more judiciously. When producers’ payoffs depend on consumer actions (e.g, votes or purchases) and consumers are highly connected, consumers perfectly infer quality and misinformation has no impact.