Signaling to the Crowd: Private Quality Information and Rewards-Based Crowdfunding
44 Pages Posted: 19 Dec 2016 Last revised: 5 Aug 2018
Date Written: July 31, 2018
We consider an entrepreneur designing a fixed funding rewards-based crowdfunding campaign for an innovative product. Product quality is known to the entrepreneur but unknown to some backers. We study how the entrepreneur can signal quality to backers via the design of the crowdfunding campaign, including the price of the reward and the funding target. We find that the entrepreneur should signal high quality by setting a high target that is distorted above the full information optimal level. While a separating equilibrium always exists, a pooling equilibrium can only occur under very specific circumstances. We show that the high target affects the quality choice of entrepreneurs and may deter high quality, innovative projects. We also show how the entrepreneur should modify the signaling strategy in a variety of circumstances, including when the post-campaign phase has significant additional costs or benefits, when a high target potentially deters backers from pledging due to a cost participating in a failed campaign, and when backers can dynamically learn by observing the current number of pledges.
Keywords: rewards-based crowdfunding, fixed funding, asymmetric information, signaling
JEL Classification: D81, D82, M11, M13, M31
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