Does Transparent Crowdfunding Foster Investment Efficiency?
65 Pages Posted: 17 Aug 2016 Last revised: 6 Dec 2018
Date Written: October 1, 2018
We study how investment efficiency in a crowdfunding market depends on market characteristics, such as information distribution, transparency, and investor rationality. Our model explains why, even if investors are rational, crowdfunding often produces extreme funding outcomes unexplained by fundamentals. We show that transparent crowdfunding produces efficient allocations only when the information environment is sufficiently heterogeneous. Using micro-level data on investment contributions from a large U.S. platform, we find strong corroborating evidence of these effects. Overall, this paper identifies and tests principal mechanisms driving investment efficiency and funding uncertainty in crowdfunding markets, thereby informing the debate on crowdfunding design and regulation.
Keywords: Crowdfunding, Capital allocation efficiency, Information
JEL Classification: D83, G11
Suggested Citation: Suggested Citation