Signaling to the Crowd: Private Quality Information and Rewards-Based Crowdfunding

Abstract

Problem definition: We consider an entrepreneur designing a fixed funding rewards-based crowdfunding campaign for an innovative product. Product quality is known to the entrepreneur but unknown to some backers. We study how the entrepreneur can signal quality to backers via the design of the crowdfunding campaign, including the price of the reward and the funding target. Academic/practical relevance: Crowdfunding is a new and popular way of funding innovative products. Despite numerous advantages, there are challenges to this model, one of the most significant being credibly signaling information about product quality to a pool of small, uninformed investors. We explore how an entrepreneur might accomplish this and overcome a key obstacle to crowdfunding. Methodology: We employ a game theoretic model of signaling between an entrepreneur and campaign backers. Results: We find that the entrepreneur should signal high quality by setting a high target that is distorted above the full information optimal level. While a separating equilibrium always exists, a pooling equilibrium can only occur under very specific circumstances. We show that the high target affects the quality choice of entrepreneurs and may deter unique, high-quality projects. In addition, we discuss how the entrepreneur should modify the signaling strategy when a high target potentially deters backers from pledging because of the cost of participating in a failed campaign. Managerial implications: We show how entrepreneurs can effectively design their crowdfunding campaign to signal high quality, thus providing guidance to creators listing products on crowdfunding websites. We also show information asymmetry and signaling affect product quality decisions by creators, which in turn is of interest to platform designers seeking to solicit high-quality products for their platforms.

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. While most prior studies focus on crowd and project characteristics, such as gender (Greenberg & Mollick, ) or geographical origin (Agrawal, Catalini, & Goldfarb, , ; Lin & Viswanathan, ), our contribution lies in examining the choice of AON versus KIA relative to different project characteristics, the impact on the crowd's willingness to pledge money, and the ultimate campaign outcome.…”

OM Forum—Innovative Online Platforms: Research Opportunities

“…Along these lines, Hu et al (2015) showed that when providers are sufficiently heterogeneous, a seeker should offer a menu of products instead of offering a single product. Chakraborty and Swinney (2017) found that a seeker should signal the quality of its product by using the funding target instead of the pledge price; Chang (2017) showed that a seeker's profit under fixed funding is larger than that under flexible funding.…”

Re-Examining Crowdfunding Success: How the Crowdfunding Goal Moderates the Relationship of Success Factors and Crowdfunding Performance

“…Given the information asymmetries about the true characteristics of a crowdfunding project between project founders and the crowd (Courtney et al, 2017;Steigenberger & Wilhelm, 2018;Vismara, 2018), the project goal itself can act as a signal. As Chakraborty and Swinney (2020) and Devaraj and Patel (2016) argue, a higher funding goal may signal confidence of the project founders and high-quality of the crowdfunding project. In contrast, Frydrych et al (2014) argue that a high funding goal can decrease the legitimacy of the project if the project founders do not provide a convincing justification for the set funding goal.…”