A Capital User’s Perspective on Crowdfunding Efficiency
76 Pages Posted: 17 Aug 2016 Last revised: 11 Aug 2019
Date Written: August 1, 2019
We study how funding dynamics in a crowdfunding market affect capital users who seek to minimize underfunding risk. Our model shows that entrepreneurs benefit from market transparency if the information on the project is sufficiently heterogeneous or the entrepreneur is not too averse to funding uncertainty. However, the appeal of transparent markets to high-quality entrepreneurs is sensitive to funding restrictions. Using micro-level data on investment contributions from a large crowdfunding platform, we find evidence consistent with the model’s predictions. Overall, we identify the key relationships between characteristics of crowdfunding markets and entrepreneurs’ preferences. Our results highlight competitive advantages and risks for crowdfunding platforms and inform the regulatory debate on funding restrictions.
Keywords: crowdfunding, entrepreneurship, investment efficiency
JEL Classification: D83, G11
Suggested Citation: Suggested Citation