(Crowd)Funding Innovation: Financing Constraints, Price Discrimination and Welfare

39 Pages Posted: 2 May 2015 Last revised: 16 Jun 2016

See all articles by Praveen Kumar

Praveen Kumar

University of Houston - Department of Finance

Nisan Langberg

University of Houston - C.T. Bauer College of Business; Tel Aviv University - Coller School of Management

David Zvilichovsky

Coller School of Management Tel Aviv University

Date Written: June 5, 2016

Abstract

We derive the optimal crowdfunding contract of a financially constrained monopolist and analyze its implications for production, investment and welfare. Crowdfunding contracts may serve as a price-discrimination mechanism, forcing pivotal consumers to pay a premium above the future spot price, thus increasing profits. When raising funds is costly, entrepreneurs balance the benefits from price discrimination against the costs of external financing, and respond to tighter financing constraints by decreasing the degree of price discrimination and increasing production. When crowdfunding is available, reducing the cost of capital, a common policy instrument used for spurring innovation, may unintentionally reduce production and welfare.

Keywords: Crowdfunding, Financing Platforms, Price Discrimination, Financial Constraints

JEL Classification: L1, G23, G32

Suggested Citation

Kumar, Praveen and Langberg, Nisan and Zvilichovsky, David, (Crowd)Funding Innovation: Financing Constraints, Price Discrimination and Welfare (June 5, 2016). Available at SSRN: https://ssrn.com/abstract=2600923 or http://dx.doi.org/10.2139/ssrn.2600923

Praveen Kumar

University of Houston - Department of Finance ( email )

Houston, TX 77204
United States
713-743-4770 (Phone)
713-743-4789 (Fax)

Nisan Langberg

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

Tel Aviv University - Coller School of Management ( email )

Tel Aviv
Israel

David Zvilichovsky (Contact Author)

Coller School of Management Tel Aviv University ( email )

Tel Aviv University
Ramat Aviv, Tel Aviv, 69978
Israel

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