American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
A Theory of Crowdfunding: A Mechanism Design Approach with Demand Uncertainty and Moral Hazard
American Economic Review
vol. 107,
no. 6, June 2017
(pp. 1430–76)
Abstract
Crowdfunding provides innovation in enabling entrepreneurs to contract with consumers before investment. Under aggregate demand uncertainty, this improves screening for valuable projects. Entrepreneurial moral hazard and private cost information threatens this benefit. Crowdfunding's after-markets enable consumers to actively implement deferred payments and thereby manage moral hazard. Popular crowdfunding platforms offer schemes that allow consumers to do so through conditional pledging behavior. Efficiency is sustainable only if expected returns exceed an agency cost associated with the entrepreneurial incentive problems. By reducing demand uncertainty, crowdfunding promotes welfare and complements traditional entrepreneurial financing, which focuses on controlling moral hazard.Citation
Strausz, Roland. 2017. "A Theory of Crowdfunding: A Mechanism Design Approach with Demand Uncertainty and Moral Hazard." American Economic Review, 107 (6): 1430–76. DOI: 10.1257/aer.20151700Additional Materials
JEL Classification
- D21 Firm Behavior: Theory
- D81 Criteria for Decision-Making under Risk and Uncertainty
- D82 Asymmetric and Private Information; Mechanism Design
- D86 Economics of Contract: Theory
- G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- L26 Entrepreneurship