Regulating false claims in influencer marketing

Firms have increasingly used social media influencers to promote and sell their products. However, influencers may make false claims about the products to boost sales. To mitigate such dishonest selling, a regulator may impose penalties on firms and/or influencers for identified false claims. In response, influencers can make their claims deceptive so that it is difficult for the regulator and consumers to detect them. We investigate an influencer's claim of product quality in the presence of skeptical consumers and regulations on false claims. We show that the influencer will be more likely to exaggerate the quality level of a low-quality product if the penalty is smaller, the quality level is lower, or the influencer's followers account for a larger portion of a firm's target market. As the product quality level increases, the influencer reduces the deceptiveness level of her false claim, which makes the false claim more likely to be identified by the regulator and may lead to a lower profit for the firm. A stricter regulation on false claims may make the firm better off, but it may reduce consumer surplus and even undermine social welfare. When setting the penalty level, the regulator may allow false claims to exist if the quality difference between high- and low-quality products is sufficiently small. Moreover, the regulator should impose strict regulations when consumers are easy to deceive and the product quality difference is large. Our findings offer managerial insights for firms to conduct influencer marketing and for regulators to design effective regulations.