Optimal Crowdfunding Design

22 Pages Posted: 10 Oct 2014

See all articles by Matthew Ellman

Matthew Ellman

Institut d'Anàlisi Econòmica (CSIC); Barcelona Graduate School of Economics (Barcelona GSE)

Sjaak Hurkens

Institute for Economic Analysis-CSIC; Barcelona GSE

Multiple version iconThere are 2 versions of this paper

Date Written: October 1, 2014

Abstract

This paper investigates the optimal design of crowdfunding where crowdfunders are potential consumers with standard motivations and entrepreneurs are profit maximizing agents. We characterize the typical crowdfunding mechanism where the entrepreneur commits to produce only if aggregate funding exceeds a defined threshold. We study how the entrepreneur uses this threshold, in conjunction with a minimal price, for rent, extraction. Compared to a standard posted price mechanism, total welfare may rise because the entrepreneur can adapt the production decision to demand conditions, but may fall because rent-seeking can worsen. Crowdfunding platforms can raise threshold credibility. So we also compare outcomes when the entrepreneur commits to a threshold against those where the entrepreneur simply decides on production after observing crowdfunder bids. Finally, we contrast crowdfunding with the optimal mechanism where production is contingent on a general function of all bids, rather than the simple sum of bids obliged by the aggregate threshold rule. Crowdfunding is very different, for instance, never committing to produce the good when aggregate bids fall short of the fixed cost (even absent credit constraints).

Keywords: Crowdfunding, mechanism design

JEL Classification: C72, D42, L12

Suggested Citation

Ellman, Matthew and Hurkens, J.P.M. (Sjaak), Optimal Crowdfunding Design (October 1, 2014). NET Institute Working Paper No. 14-21, Available at SSRN: https://ssrn.com/abstract=2507457 or http://dx.doi.org/10.2139/ssrn.2507457

Matthew Ellman (Contact Author)

Institut d'Anàlisi Econòmica (CSIC) ( email )

UAB Campus
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Spain
0034935806612 (Phone)

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

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J.P.M. (Sjaak) Hurkens

Institute for Economic Analysis-CSIC

campus UAB
Bellaterra, 08193
Spain

Barcelona GSE ( email )

Barcelona
Spain
(34-93) 5806612 (Phone)
(34-93) 5801452 (Fax)

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