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Adverse Incentives in Crowdfunding

Thomas Hildebrand

E.CA Economics

Manju Puri

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER); Duke Innovation & Entrepreneurship Initiative

Jörg Rocholl

ESMT European School of Management and Technology

October 06, 2014

This paper analyses the substantially growing markets for crowdfunding, in which retail investors lend to borrowers without financial intermediaries. Critics suggest these markets allow sophisticated investors to take advantage of unsophisticated investors. The growth and viability of these markets critically depends on the underlying incentives. We provide evidence of perverse incentives in crowdfunding that are not fully recognized by the market. In particular we look at group leader bids in the presence of origination fees and find that these bids are (wrongly) perceived as a signal of good loan quality, resulting in lower interest rates. Yet these loans actually have higher default rates. These adverse incentives are overcome only with sufficient skin in the game and when there are no origination fees. The results provide important implications for crowdfunding, its structure and regulation.

Number of Pages in PDF File: 47

Keywords: Financial Disintermediation, Crowdfunding, Consumer Lending

JEL Classification: G01, G20, G21, G23

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Date posted: May 25, 2010 ; Last revised: October 21, 2014

Suggested Citation

Hildebrand, Thomas and Puri, Manju and Rocholl, Jörg, Adverse Incentives in Crowdfunding (October 06, 2014). Available at SSRN: https://ssrn.com/abstract=1615483 or http://dx.doi.org/10.2139/ssrn.1615483

Contact Information

Thomas Hildebrand (Contact Author)
E.CA Economics ( email )
Schlossplatz 1
Berlin, 10178
Manju Puri
Duke University - Fuqua School of Business ( email )
1 Towerview Drive
Box 90120
Durham, NC 27708-0120
United States
919-660-7657 (Phone)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Duke Innovation & Entrepreneurship Initiative
215 Morris St., Suite 300
Durham, NC 27701
United States

Joerg Rocholl
ESMT European School of Management and Technology ( email )
Schlossplatz 1
HOME PAGE: http://www.esmt.org/en/159244
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