Experimental Study of Crowdfunding Cascades: When Nothing is Better than Something
27 Pages Posted: 11 Aug 2013 Last revised: 12 Aug 2017
Date Written: October 17, 2013
The rise of crowdfunding marketplaces, online platforms that enable fundraisers to easily aggregate even small contributions to reach a publicly announced fundraising goal, have begun to change the way fundraisers raise capital. These open fundraising marketplaces stand in stark contrast to traditional fundraising markets that restrict participation to investors with large amounts of monetary and social capital. Many advocates have welcomed these changes and claimed that crowdfunding marketplaces are democratizing the allocation of resources. However, research on social influence and social embeddedness suggests that resources are not always distributed according the ”wisdom the crowds”. We investigate this democratization claim by conducing a novel field experiment on a crowdfunding platform. We randomly selected new projects and assign them into one of three conditions: no contribution, a small contribution ($5) or a moderate-sized contribution ($40). Consistent with prior work on social influence, we find that projects to which we made a moderate-sized first contribution slightly outperform projects which received no contribution even after accounting for the fact that projects are closer to their fundraising goals. Contrary to prior work, we find that small initial contributions significantly decrease the chances of success for a project. This asymmetry in influence implies that not only do those with the resources to make large contributions have disproportionate influence but paradoxically that those with limited means may actually undermine their own preferences by participating in these fundraising marketplaces. Ironically, this asymmetry suggests that the openness of these markets may actually produce funding patterns that are less reflective of market participant preferences than a more exclusionary marketplace.
Keywords: status, cognition, field experiment, crowdfunding, cumulative advantage
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