Some Simple Economics of Crowdfunding

47 Pages Posted: 18 Jun 2013 Last revised: 13 Oct 2021

See all articles by Ajay K. Agrawal

Ajay K. Agrawal

University of Toronto - Rotman School of Management; National Bureau of Economic Research (NBER)

Christian Catalini

Diem Association and Diem Networks US; Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Avi Goldfarb

University of Toronto - Rotman School of Management

Date Written: June 2013

Abstract

It is not surprising that the financing of early-stage creative projects and ventures is typically geographically localized since these types of funding decisions are usually predicated on personal relationships and due diligence requiring face-to-face interactions in response to high levels of risk, uncertainty, and information asymmetry. So, to economists, the recent rise of crowdfunding - raising capital from many people through an online platform - which offers little opportunity for careful due diligence and involves not only friends and family but also many strangers from near and far, is initially startling. On the eve of launching equity-based crowdfunding, a new market for early-stage finance in the U.S., we provide a preliminary exploration of its underlying economics. We highlight the extent to which economic theory, in particular transaction costs, reputation, and market design, can explain the rise of non-equity crowdfunding and offer a framework for speculating on how equity-based crowdfunding may unfold. We conclude by articulating open questions related to how crowdfunding may affect social welfare and the rate and direction of innovation.

Suggested Citation

Agrawal, Ajay K. and Catalini, Christian and Goldfarb, Avi, Some Simple Economics of Crowdfunding (June 2013). NBER Working Paper No. w19133, Available at SSRN: https://ssrn.com/abstract=2281044

Ajay K. Agrawal (Contact Author)

University of Toronto - Rotman School of Management ( email )

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National Bureau of Economic Research (NBER)

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Christian Catalini

Diem Association and Diem Networks US ( email )

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Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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HOME PAGE: http://https://mitsloan.mit.edu/faculty/directory/christian-catalini

National Bureau of Economic Research (NBER) ( email )

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Avi Goldfarb

University of Toronto - Rotman School of Management ( email )

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Canada
416-946-8604 (Phone)
416-978-5433 (Fax)

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