Crowdfunding: Disintermediated Investment Banking

Abstract

This paper introduces crowdfunding as a concept and model for the evolution of investment banking. Crowdfunding, an application of crowdsourcing, is defined as one party’s attempt to finance a project by offering three types of investment opportunities to potential investors. The investment opportunities are donations, passive investments, and active investments. From this foundation I develop a model in which interdependent agents operate in a dynamic, discrete setting. Potential investors decide whether or not to invest in one of three opportunities each period while the entrepreneur sets the parameters of the game to maximize the probability of successful financing. I then simulate the model to analyze the effects changes in key parameters have on the results of the game.

Keywords: Crowdfunding, Crowd, Funding, Financing, Financial, Crowdsourcing, Network, Finance, Bank, Banking, Relationship, Evolution, Investment, Commercial, Customer, Participation, Primary, Markets

JEL Classification: G24, G32, L26, O30, P34