Crowdfunding mechanism comparison when product quality is uncertain

Tengfei Nie · Xinxiu Wang · Yangguang Zhu · Shaofu Du

33 citations0/0 files storedInternational Transactions in Operational Research

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FinTech, Crowdfunding, Digital Finance Supply Chain and Inventory Management Capital Investment and Risk Analysis

Abstract

Abstract Many entrepreneurs have recently employed crowdfunding to raise money. Although there are several crowdfunding mechanisms, there is no clear dominant strategy for the type of mechanisms that should be adopted by the entrepreneur. This paper compares two commonly used mechanisms of crowdfunding by building a two‐person and two‐period model where the entrepreneur first makes the decision then two consumers follow. The all‐or‐nothing ( ) mechanism allows entrepreneurs to set a funding target and keep nothing unless the goal is achieved. In contrast, entrepreneurs under the keep‐it‐all ( ) mechanism must also set a target and keep any funds regardless of whether the goal has been achieved. To compare these two mechanisms, we assume that customers are not sure about the quality of the product, which is very common in reward‐based crowdfunding. Using a unified model, our results show that large or poorly scalable projects are more likely to choose the mechanism.

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References

2013The dynamics of crowdfunding: An exploratory study 2013Crowdfunding: Tapping the right crowd 2015Signaling in Equity Crowdfunding 2003Picking winners or building them? Alliance, intellectual, and human capital as selection criteria in venture financing and performance of biotechnology startups 1985Criteria used by venture capitalists to evaluate new venture proposals 2003The financing of business start-ups 2015Crowdfunding: Geography, Social Networks, and the Timing of Investment Decisions 2014Some Simple Economics of Crowdfunding

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