Optimal Crowdfunding Design
40 Pages Posted: 17 Feb 2016 Last revised: 7 Dec 2016
Date Written: October 29, 2016
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. Platforms sometimes promote not-for-profits to raise success rates. When new buyers arrive ex-post, crowdfunding’s market-test complements traditional finance and optimizes subsequent pricing. 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
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