Optimal Crowdfunding Design

65 Pages Posted: 2 Jan 2016 Last revised: 17 Feb 2016

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: December 31, 2015

Abstract

We characterize optimal reward-based crowdfunding where production is contingent on an aggregate funding threshold. Crowdfunding adapts project-implementation to demand (market-testing) and its multiple prices enhance rent-extraction via pivotality, even for large crowds, indeed arbitrarily large if tastes are correlated. Adaptation raises welfare. Rent-extraction can enhance adaptation, but sometimes distorts production and lowers welfare. Threshold commitment, central to All-Or-Nothing platforms, raises profits but can lower consumer welfare. When new buyers arrive ex-post, crowdfunding’s market-test complements traditional finance and optimizes subsequent pricing. We prove that crowdfunding is a general optimal mechanism in our baseline.

Keywords: Crowdfunding, mechanism design, entrepreneurial finance, market-testing, adaptation, rent-extraction

JEL Classification: C72, D42, L12

Suggested Citation

Ellman, Matthew and Hurkens, J.P.M. (Sjaak), Optimal Crowdfunding Design (December 31, 2015). Available at SSRN: https://ssrn.com/abstract=2709617 or http://dx.doi.org/10.2139/ssrn.2709617

Matthew Ellman

Institut d'Anàlisi Econòmica (CSIC) ( email )

UAB Campus
IAE-CSIC
E-08193 Bellaterra, Barcelona 08193
Spain
0034935806612 (Phone)

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

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

J.P.M. (Sjaak) Hurkens (Contact Author)

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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