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Adverse Incentives in Crowdfunding

47 Pages Posted: 25 May 2010 Last revised: 21 Oct 2014

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

Date Written: 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.

Keywords: Financial Disintermediation, Crowdfunding, Consumer Lending

JEL Classification: G01, G20, G21, G23

Suggested Citation

Hildebrand, Thomas and Puri, Manju and Rocholl, Jörg, Adverse Incentives in Crowdfunding (October 06, 2014). Available at SSRN: or

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
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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


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