Crowdfunding Platforms: The Role of Information Providers

35 Pages Posted: 1 Sep 2016

See all articles by Zhenhua Wu

Zhenhua Wu

Arizona State University (ASU) - Economics Department

Zhijie Lin

Tsinghua University

Yong Tan

University of Washington - Michael G. Foster School of Business

Date Written: August 31, 2016

Abstract

Despite the popular emergence of crowdfunding platforms, relevant research investigating the role of these platforms in crowdfunding markets still lags. In this paper, we present a model to study market incentives of crowdfunding platforms' optimal information reporting strategy when there exists uncertainty on projects' returns. We assume that platforms on the market are rational players, and they seek to stay on the market as long as possible as accurate information providers. We characterize platforms' equilibrium reporting strategies under different market conditions. Surprisingly, we find that under certain conditions, the potential competition from a new entrant gives the incumbent crowdfunding platform an incentive to bias the information on borrowers' risky projects. However, the uncertainty resolution provided by a third party (e.g., regulator, media) could reduce the incentive. Our findings contribute to the literature on crowdfunding by analyzing platform decisions, and offer policy implications for the regulations of crowdfunding markets.

Keywords: crowdfunding platforms, information provider, financial intermediaries, asymmetric information, Bayesian update, perfect Bayesian equilibrium

Suggested Citation

Wu, Zhenhua and Lin, Zhijie and Tan, Yong, Crowdfunding Platforms: The Role of Information Providers (August 31, 2016). Available at SSRN: https://ssrn.com/abstract=2832597 or http://dx.doi.org/10.2139/ssrn.2832597

Zhenhua Wu (Contact Author)

Arizona State University (ASU) - Economics Department ( email )

Tempe, AZ 85287-3806
United States

Zhijie Lin

Tsinghua University ( email )

Haidian District
Beijing, Beijing 100084
China

Yong Tan

University of Washington - Michael G. Foster School of Business ( email )

Box 353226
Seattle, WA 98195-3226
United States

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