Designing Social Learning

TL;DR

This paper analyzes how strategic considerations in social learning lead to inherently noisy product reviews, and proposes an optimal mechanism that encourages truthful extreme reports while pooling moderate experiences.

Contribution

It introduces a model showing that review communication is inevitably noisy due to conflicting incentives, and identifies an optimal truthful pooling mechanism for reviews.

Findings

Communication via reviews is inherently noisy due to conflicting incentives.

Optimal mechanism involves truthful reporting of extreme experiences.

Moderate experiences are pooled together to improve overall information quality.

Abstract

This paper studies strategic communication in the context of social learning. Product reviews are used by consumers to learn product quality, but in order to write a review, a consumer must be convinced to purchase the item first. When reviewers care about welfare of future consumers, this leads to a conflict: a reviewer today wants the future consumers to purchase the item even when this comes at a loss to them, so that more information is revealed for the consumers that come after. We show that due to this conflict, communication via reviews is inevitably noisy, regardless of whether reviewers can commit to a communication strategy or have to resort to cheap talk. The optimal communication mechanism involves truthful communication of extreme experiences and pools the moderate experiences together.