Learning Through Crowdfunding

Abstract

We develop a model where reward-based crowdfunding enables …rms to obtain a reliable proof of concept early in their production cycle. The information gathered from a subsample of backers through a …xed length pre-selling campaign enables …rms to update their beliefs about the preferences of all future consumers. This creates a valuable real option as …rms invest only if updated demand is high. Further, such updating mitigates moral hazard: the higher the funds raised, the lower the …rms' incentives to divert them. Our results are consistent with stylized facts and provide new testable implications.

Crowdfunding models: Keep‐It‐All vs. All‐Or‐Nothing

“…Prior empirical and theoretical work on crowdfunding has focused on the factors that affect success on reward‐based crowdfunding platforms that only offer AON crowdfunding including Kickstarter (Belleflamme et al., ; Chemla and Tinn, ; Colombo, Franzoni, & Rossi‐Lamastra, ; Mollick, ; Mollick & Kuppuswamy, ). Our theoretical setting differs from prior and contemporaneous work on crowdfunding and signaling (Chakraborty and Swinney, ) by examining the role of funding model choice as a signal in the crowdfunding campaign.…”

“…These platforms enable clear mechanisms through which individuals can provide money for, or even invest in, early‐stage entrepreneurial firms (Belleflamme, Lambert, & Schwienbacher, ; Mollick, ; Vismara, ). Understanding how crowdfunding works has attracted increasing interest from research scholars (Burtch, Ghose, & Wattal, ; Chemla and Tinn, ; Iyer, Khwaja, Luttmer, & Shue, ; Kuppuswamy & Bayus, ; Roma, Petruzzelli, & Perrone, ; Stanko and Henard, ; Yu, Johnson, Lai, Cricelli, & Fleming, ). However, most of this research abstracts from the fact that platforms differ significantly from each other.…”

The One-Shot Crowdfunding Game.

“…An immediate conclusion is that large crowdfunding campaigns, in the format we study, necessarily exhibit market failure when prices are moderate. 4 This failure probability is given by 1−p p 1−τ τ µ and the following comparative statics follow immediately: Corollary 1. . For any large crowdfunding game with prior µ, signal quality p and a moderate price τ the market failure probability decreases as one of the following 4 Compare this observation with Condorcet's jury theorem which argues that in a majority vote, large societies necessarily choose the correct alternative.…”

Crowdfunding in a Competitive Environment

“…12 In this case the level of competition with producers of similar products increases. Theoretical research on crowdfunding has generally followed this trend and has mostly assumed that crowdfunding is used under monopoly conditions (see, for example, Belleflamme et al (2014); Chang (2016); Strausz (2017); Chemla and Tinn (2019) or Miglo and Miglo (2019)). However, much less is known about the role of crowdfunding in explaining the behaviour of entrepreneurs operating in competitive markets including cases when entrepreneurs who use crowdfunding compete against entrepreneurs who do not.…”