A Theory of Crowdfunding: A Mechanism Design Approach with Demand Uncertainty and Moral Hazard
American Economic Review · 2017 · Volume 107 · Issue 6
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.
Keywords
Firm Behavior: Theory, Criteria for Decision-Making under Risk and Uncertainty, Asymmetric and Private Information, Mechanism Design, Economics of Contract: Theory, Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill, Entrepreneurship
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