Market Mechanisms in Online Crowdfunding
Purdue University - Krannert School of Management
University of Arizona - Eller College of Management
July 1, 2015
Online crowdfunding has emerged as an appealing new channel of financing in recent years. A fundamental but largely unanswered question in this nascent industry is the choice of market mechanisms, i.e., how the supply and demand of funds are matched, and the terms (price) at which transactions will occur. Two of the most popular such mechanisms are auctions (where the "crowd" determines the price of the transaction through an auction process) and posted prices (where the platform determines the price). While crowdfunding platforms typically use one or the other, there is little systematic research on the implications of such choices for the behavior of market participants, transaction outcomes, and social welfare. We address this question both theoretically and empirically in the context of debt-based crowdfunding. We first develop a game-theoretic model that yields empirically testable hypotheses, taking into account the incentive of the crowdfunding platform. We then test these hypotheses by exploiting a regime change from auctions to posted prices on one of the largest debt-based crowdfunding platforms. Consistent with our hypotheses, we find that under platform-mandated posted prices, loans are funded with higher probability, but the pre-set interest rates are higher than borrowers' starting interest rates in auctions. More important, all else equal, loans funded under the posted-price regime are more likely to default, thereby undermining lenders' returns on investment and their surplus from trading. Although platform-mandated posted prices may be faster in originating loans, auctions that rely on the "crowd" to discover prices are not necessarily inferior in terms of overall social welfare.
Number of Pages in PDF File: 37
Keywords: Crowdfunding, Peer-to-peer lending, Market mechanisms, Auctions, Posted prices
Date posted: September 21, 2013 ; Last revised: July 15, 2015
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