A Dynamic Model of Crowdfunding

39 Pages Posted: 26 Feb 2016 Last revised: 27 Jun 2018

See all articles by Saeed Alaei

Saeed Alaei

Google Inc.

Azarakhsh Malekian

University of Toronto - Rotman School of Management; Massachusetts Institute of Technology (MIT) - Electrical Engineering and Computer Science

Mohamed Mostagir

University of Michigan, Stephen M. Ross School of Business

Date Written: February 19, 2016

Abstract

Crowdfunding is quickly emerging as an alternative to traditional methods of funding new products. In a crowdfunding campaign, a seller solicits financial contributions from a crowd, usually in the form of pre-buying an unrealized product, and commits to producing the product if the total amount pledged is above a certain threshold. We provide a model of crowdfunding in which consumers arrive sequentially and make decisions about whether to pledge or not. Pledging is not costless, and hence consumers would prefer not to pledge if they think the campaign will not succeed. This can lead to cascades where a campaign fails to raise the required amount even though there are enough consumers who want the product. The paper introduces a novel stochastic process -- anticipating random walks -- to analyze this problem. The analysis helps explain why some campaigns fail and some do not, and provides guidelines about how sellers should design their campaigns in order to maximize their chances of success.

Keywords: crowds, stochastics, dynamic programming, random walk, revenue management

JEL Classification: D80, L11, L12, M13

Suggested Citation

Alaei, Saeed and Malekian, Azarakhsh and Mostagir, Mohamed, A Dynamic Model of Crowdfunding (February 19, 2016). Ross School of Business Paper No. 1307. Available at SSRN: https://ssrn.com/abstract=2737748 or http://dx.doi.org/10.2139/ssrn.2737748

Saeed Alaei

Google Inc. ( email )

1600 Amphitheatre Parkway
Second Floor
Mountain View, CA 94043
United States

Azarakhsh Malekian

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Massachusetts Institute of Technology (MIT) - Electrical Engineering and Computer Science ( email )

77 Massachusetts Avenue
Cambridge, MA 02139-4307
United States

Mohamed Mostagir (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

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