Rethinking Crowdfunding Platform Design: Mechanisms to Deter Misconduct and Improve Efficiency

Abstract

Lacking credible rule-enforcement mechanisms to punish misconduct, existing reward-based crowdfunding platforms can leave backers exposed to two risks: entrepreneurs may run away with backers’ money (funds misappropriation), and product specifications may be misrepresented (performance opacity). We show that each of these risks can materially impact crowdfunding efficiency, and, when jointly present, they interact with each other in ways that can dampen or, more worryingly, amplify their individual adverse effects. To mitigate these risks, we propose two mechanisms based on deferred payments. The first involves stopping the campaign once the funding goal is reached and servicing any unmet demand in the aftermarket. The second involves escrowing any funds raised in excess of the goal, as insurance for backers. We show that early stopping dominates escrow and boosts platform revenues. Pairing these deferred payment designs with (costly) performance verification contingencies can bring additional gains, but doing so can flip their relative performance, with escrow coming out on top. Overall, by accounting for different timing (pre- versus post-campaign) and enforcement rules (mandatory versus optional) of the verification contingencies, we analyze a total of 10 different designs and show that two of them dominate: the early stopping design and the escrow design with mandatory ex-post verification. We conclude by providing recommendations for which design works best under different conditions and exploring the potential of crowdsourced performance checks. This paper was accepted by Terry Taylor, operations management.

Greening crowdfunding campaigns: an investigation of message framing and effective communication strategies for funding success

“…Because backers must rely not on verified information but on the information the entrepreneur chooses to report on the campaign page, ample room does remain for the misrepresentation of product features and performance. However, the indication of a quantitative goal mitigates the risk of performance opacity perceived by backers, especially in crowdfunding campaigns (Belavina et al , 2020).…”

Token-Weighted Crowdsourcing

“…in Networks Our work is closely related to the literature on crowdsourcing, which studies the ability of firms to source information (Araman andCaldentey 2016, Papanastasiou et al 2017), funds (Alaei et al 2016, Strausz 2017, Belavina et al 2020, or innovation (Terwiesch and Xu 2008, Bimpikis et al 2015, Stouras et al 2017) from users. We are not aware of any work in this literature that, like we do, examines the feasibility and effectiveness of crowdsourcing information and effort using a τ-weighted mechanism.…”

Frontiers in Service Science: Fintech Operations—An Overview of Recent Developments and Future Research Directions

“…Kumar et al (2020) discuss the impact of uncertainty and market size on the contract regime. Motivated by two potential risks from fundraisers-namely, fundraisers running away with funders' funds and misrepresentation of product specifications- Belavina et al (2020) design two mechanisms from deferred payment perspectives to help mitigate the risks. In addition, the interactions between fundraisers and funders are also widely studied.…”