A Potato Salad With a Lemon Twist: Using a Supply-side Shock to Study the Impact of Opportunistic Behavior on Crowdfunding Platforms

53 Pages Posted: 10 May 2016 Last revised: 6 Dec 2017

See all articles by Hilah Geva

Hilah Geva

Tel Aviv University - Faculty of Management

Ohad Barzilay

Tel Aviv University - Coller School of Management

Gal Oestreicher-Singer

Tel Aviv University - Coller School of Management

Date Written: May 9, 2016

Abstract

Crowdfunding platforms are peer-to-peer two-sided markets that enable amateur entrepreneurs to raise money for their ventures over the Internet. However, in allowing practically anyone to enter, such markets risk being flooded with low-quality offerings, a situation that might be detrimental to the success of higher-quality products. We empirically investigate the implications of such a situation, referred to as a “market of lemons”. We analyze a quasi-natural experiment in the form of an exogenous media shock that occurred on Kickstarter.com. The shock was followed by a sharp increase in the number of campaigns, particularly low-quality ones, offered on the supply side of the market; no such increase was observed on the demand side of the market (backers who contribute to campaigns). These unique conditions enable us to estimate how crowdfunding platforms are affected by the presence of an atypically large number of low-quality campaigns, while controlling for temporal trends and seasonal effects. We use two novel identification strategies to show that, in line with theory, a market of lemons significantly decreases the revenue of successful campaigns. However, campaign quality moderates this effect, such that the performance of the highest-quality campaigns is unaffected. We discuss theoretical implications as well as managerial implications for entrepreneurs.

Keywords: Kickstarter, Share-economy, Peer economy, Two sided market, Supply side, Exogenous shock, Crowdfunding, Market of Lemons, Natural experiment

Suggested Citation

Geva, Hilah and Barzilay, Ohad and Oestreicher-Singer, Gal, A Potato Salad With a Lemon Twist: Using a Supply-side Shock to Study the Impact of Opportunistic Behavior on Crowdfunding Platforms (May 9, 2016). Available at SSRN: https://ssrn.com/abstract=2777474 or http://dx.doi.org/10.2139/ssrn.2777474

Hilah Geva (Contact Author)

Tel Aviv University - Faculty of Management ( email )

P.O. Box 39010
Ramat Aviv, Tel Aviv, 69978
Israel

Ohad Barzilay

Tel Aviv University - Coller School of Management ( email )

Tel Aviv
Israel

Gal Oestreicher-Singer

Tel Aviv University - Coller School of Management ( email )

Tel Aviv
Israel

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