The Economics of Crowdfunding

Abstract

An entrepreneur finances her project with common value via crowdfunding. She chooses a funding mechanism (fixed or flexible), a price, and a funding goal. Under fixed funding money is refunded if the goal is not met; under flexible funding the entrepreneur keeps the money. Backers observe signals about the value and decide whether to contribute or postpone purchase to the retail stage. The optimal crowdfunding campaign is characterized. We show that fixed funding campaigns perform better than the flexible ones through an application of the linkage principle, we also show that third-party crowdfunding sites serves as a commitment device that the entrepreneur will use to eliminate moral hazard.

Keywords: Crowdfunding, Linkage Principle, Moral Hazard

JEL Classification: D42, D83, L11