Chicken or Egg? 
Asymmetry between Cross-side Network Effects in Crowdfunding Markets

Abstract

This paper studies platform growth through the lens of network effects. Drawing on the platform literature, we conceptualize network size as an informative signal that shapes potential users’ perceived attractiveness of, and thus their willingness to participate on, a two-sided platform. In the context of lending-based crowdfunding, positive cross-side network effects (CNEs) manifest when growth in the size of investors helps a platform attract more new borrowers, and when growth in the size of borrowers helps the platform get more new investors on board. These two mutually enhancing CNEs, if both exist, give rise to the “chicken or egg” paradox, obscuring whether a crowdfunding market is more investor- or borrower-driven. We collect data on user participation across multiple platforms and fit the data to panel vector autoregression models. We find that the size of past investors is positively correlated with the size of current borrowers, supporting the existence of a positive investor-to-borrower CNE. Nonetheless, the size of past borrowers is found to have no significant correlation with the size of current investors. Together, the results show that the two CNEs are asymmetric, suggesting that it is the investor side that plays a predominant role in driving overall platform growth. We also find that the magnitude of the investor-to-borrower CNE is moderated by nonnetwork factors that signal potential operating risks of the platforms. These findings enhance our understanding of network effects and generate actionable recommendations for platform managers.

Keywords: lending-based crowdfunding; network effects; two-sided market; platform growth; panel VAR