On the Use of Probabilistic Uncertain Rewards on Crowdfunding Platforms: The Case of the Lottery

Abstract

Crowdfunding aims to collect small investments from a large number of backers to support a project by fundraisers. Although uncertainty has been an important issue in the reward-based crowdfunding literature, there is limited research on how backers respond to probabilistic uncertain rewards. This study examines how backers respond to the lottery—a type of uncertain rewards—and how their motivations may shape their responses to probabilistic uncertain rewards. We hypothesize (1) how backers respond to probabilistic uncertain rewards, (2) how these effects vary over time, and (3) how backer motivations moderate their response to probabilistic uncertain rewards. We empirically test our set of hypotheses using data collected from a reward-based crowdfunding platform in China. First, the results from project-level analysis show that, although the lottery does help to attract a higher number of backers on a crowdfunding project, the lottery also reduces the total money raised by the project, and thus the probability of reaching its funding goal. Specifically, while the lottery incentivizes individuals who would otherwise not fund the project to become (small) lottery backers, it also cannibalizes regular prospective rewardees and donors by encouraging them to opt for the (cheaper) lottery option. Second, both the incentivizing and the cannibalizing effects of the lottery are stronger in the earlier stages of a project’s fundraising cycle. Third, our individual backer-level analysis shows that the lottery has larger effects on backers with higher prior tendencies to be donors than rewardees. Our study theoretically contributes to three streams of literature—crowdfunding, decision-making under uncertainty, and the lottery. From a practical standpoint, our study informs (a) fundraisers on how to design strategies to attract the right type of backers and (b) crowdfunding platform owners on how to leverage the lottery as a type of uncertain rewards in crowdfunding platforms.

Keywords: Crowdfunding, Reward-based Crowdfunding Platforms, Uncertainty, Probabilistic Rewards, Lottery