We present a model of online content sharing where agents sequentially observe an article and decide whether to share it with others. This content may or may not contain misinformation. Each agent starts with an ideological bias and gains utility from positive social media interactions but does not want to be called out for propagating misinformation. We characterize the (Bayesian–Nash) equilibria of this social media game and establish that it exhibits strategic complementarities. Under this framework, we study how a platform interested in maximizing engagement would design its algorithm. Our main result establishes that when the relevant articles have low-reliability and are thus likely to contain misinformation, the engagement-maximizing algorithm takes the form of a “filter bubble”—creating an echo chamber of like-minded users. Moreover, filter bubbles become more likely when there is greater polarization in society and content is more divisive. Finally, we discuss various regulatory solutions to such platform-manufactured misinformation.

We present a model where social media platforms offer plans that intermix entertaining content with digital advertising (“ads”). Users derive utility from entertainment and learn about their valuation for a product from ads. While some users are fully rational, others naïvely perceive digital ads as more informative than they actually are. We characterize the profit-maximizing business model of the platform and show that welfare is lower when the platform monetizes through advertising instead of subscription both for naïfs (because they are targeted by intense digital advertising, which makes them over-optimistic about product quality and over-purchase the product) and for sophisticates (because the inflated demand from naïfs increases the firm’s price). This negative welfare effect is intensified when the platform can offer mixed business models that separate the naïve and sophisticated users into different plans. Our results are robust to firm-level and platform-level competition, because digital ads soften competition between both firms and platforms. We also show how digital ad taxes can improve welfare.<br><br>Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at <a href="http://www.nber.org/papers/w33017" TARGET="_blank">www.nber.org</a>.<br>