Dynamic Effect of Digital Badges in User-Generated Content Platforms

User-generated content (UGC) platforms have increasingly adopted digital badges as a key mechanism to incentivize user engagement. Drawing from the extant literature, the authors theorize that digital badges can have an enduring effect on UGC consumption and creation beyond immediate effects because of the impact of digital badges on users' underlying engagement states with the platform. To understand the dynamic effect of digital badges on user engagement, the authors propose a hidden Markov model and estimate the model using a unique panel data set from a large UGC platform. Four distinctive engagement states of users emerge from the estimation results. The immediate impact of digital badges is generally negative and homogeneous in discouraging both content consumption and generation. However, in the longer term, digital badges encourage content generation but suppress content consumption. This double-edged effect is most pronounced when users are in the middle-range engagement states. Finally, the authors demonstrate the managerial value of the proposed model in helping UGC platforms design digital badge algorithms to achieve their key marketing goals