A Theory of Crowdfunding - A Mechanism Design Approach with Demand Uncertainty and Moral Hazard

Crowdfunding provides innovation in that it enables entrepreneurs to contract with consumers before investment. Under aggregate demand uncertainty, this improves screening for valuable projects. Entrepreneurial moral hazard threatens this benefit. Studying the subsequent trade-off between screening and moral hazard, the paper characterizes optimal mechanisms. Popular all-or-nothing reward-crowdfunding schemes reflect their salient features. Efficiency is sustainable only if returns exceed investment costs by a margin reflecting the degree of moral hazard. Constrained efficient mechanisms exhibit underinvestment. As a screening tool for valuable projects, crowdfunding promotes social welfare. Crowdfunding complements rather than substitutes traditional entrepreneurial financing.

• Publication year

  2017

• Venue

  Social Science Research Network

• Publication date

  2017-06-01

• Fields of study

  Business, Economics

• Identifiers
  DOI 10.1257/AER.20151700
• External record

  Open on Semantic Scholar

• Source metadata

  Semantic Scholar

• No claims are published for this paper.

• No concepts are published for this paper.

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