Profit Sharing: A Contracting Solution to Harness the Wisdom of the Crowd

49 Pages Posted: 2 Oct 2016 Last revised: 7 Oct 2018

See all articles by Jiasun Li

Jiasun Li

George Mason University - Department of Finance

Date Written: April 5, 2018

Abstract

When a group of investors with dispersed private information jointly invest in a risky project, how should they divide the project payoff? A typical common stock contract rewards investors in proportion to their initial investment, but does it make the best use of investors' crowd wisdom? By illustrating how a simple profit-sharing contract with decentralized decision making could often first best coordinate individuals' investment choices, this paper studies as a general contracting problem the role of profi t sharing in harnessing the "wisdom of the crowd", and discusses specific implications for FinTech applications such as the security design of investment crowdfunding.

Keywords: contract theory, crowdfunding, financial innovation, FinTech, information economics, investment, security design, wisdom of the crowd

JEL Classification: C72, D53, D82, D86, G23

Suggested Citation

Li, Jiasun, Profit Sharing: A Contracting Solution to Harness the Wisdom of the Crowd (April 5, 2018). 2017 WFA, SFS Cavalcade; 2017 Emerging Trends in Entrepreneurial Finance Conference. Available at SSRN: https://ssrn.com/abstract=2844335 or http://dx.doi.org/10.2139/ssrn.2844335

Jiasun Li (Contact Author)

George Mason University - Department of Finance ( email )

Fairfax, VA 22030
United States

HOME PAGE: http://sites.google.com/site/jiasunlihome/

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