Unleashing the Crowd: The Effect of Social Networks in Crowdfunding Markets

Abstract

We identify the crucial role social networks play in crowdfunding markets. Investors are 50% more likely to fund projects that their peers support and are 11.2% more likely to fund projects from regions where they share strong social ties, given a one-standard-deviation change in the variables. More influential peers exert a greater influence, especially in the case of riskier projects, and the peer effects are amplified in crowdfunding platforms that prioritize transparency and accountability. Social ties transmit information about economic conditions in project locations, and they complement the influence of peer effects. Furthermore, the social network effects affect project funding outcomes and can be particularly valuable in mitigating the adverse effects of natural disasters. Our findings suggest that social networks play a significant role in crowdfunding markets by increasing investor awareness, disseminating information, and ultimately influencing capital allocations. This paper was accepted by Kay Giesecke, finance. Funding: L. Peng acknowledges the Keynes Fund, the Krell research grant, and the Wassermann research grant for financial support. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.01364 .

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