On Using the Lottery in Crowdfunding Platforms: ‘Crowding in’ the Masses But ‘Crowding out’ Success

38 Pages Posted: 15 Feb 2017 Last revised: 14 Jun 2017

See all articles by Alvin Zheng

Alvin Zheng

Temple University - Department of Management Information Systems

Jing Gong

Temple University - Department of Management Information Systems

Paul A. Pavlou

Temple University - Department of Management Information Systems; Temple University - Department of Strategic Management

Date Written: February 14, 2017

Abstract

Crowdfunding aims at collecting small investments from a large number of backers to support a project by fundraisers. Since crowdfunding projects typically attract a small number of backers, this study examines the role of the lottery, a recent mechanism to attract backers in crowdfunding platforms, in key crowdfunding outcomes (total number of backers, total money raised by a project, and the probability to reach the funding goal). Using a four-year panel dataset from a reward-based crowdfunding platform in China, we show that although the lottery does help attract more backers for a project (“crowding in” the masses), it also decreases the total money raised by a project and the probability to reach the funding goal (“crowding out” success). The findings are robust across different model specifications and falsification tests. With additional analyses at the backer level, we empirically examined the underlying mechanisms of the effects of the lottery. Specifically, while the lottery incentivizes backers who would otherwise not fund the project to become lottery backers, the lottery also cannibalizes prospective backers to opt for the lottery instead of pledging a higher amount to receive the reward (the focal product of the crowdfunding project). Second, the lottery demotivates those who would otherwise back the project altruistically from becoming lottery backers. Third, the lottery also demotivates prospective backers — who would otherwise either back the project for the reward or altruistically — from backing the project. Finally, there is no evidence that the lottery serves as a quality signal of the crowdfunding project. Our study contributes to the crowdfunding literature by supporting both the positive role of the lottery in “crowding in the masses” and also the negative overall effect on “crowding out” success. Managerial implications for both fundraisers and crowdfunding platforms are also discussed.

Keywords: Lottery, Crowdfunding, Reward-Based, Intrinsic Motivation, Extrinsic Motivation, Crowdfunding Outcomes

Suggested Citation

Zheng, Alvin and Gong, Jing and Pavlou, Paul A., On Using the Lottery in Crowdfunding Platforms: ‘Crowding in’ the Masses But ‘Crowding out’ Success (February 14, 2017). Fox School of Business Research Paper No. 17-006. Available at SSRN: https://ssrn.com/abstract=2916807 or http://dx.doi.org/10.2139/ssrn.2916807

Alvin Zheng (Contact Author)

Temple University - Department of Management Information Systems ( email )

1810 N. 13th Street
Floor 2
Philadelphia, PA 19128
United States

Jing Gong

Temple University - Department of Management Information Systems ( email )

1810 N. 13th Street
Floor 2
Philadelphia, PA 19128
United States

Paul A. Pavlou

Temple University - Department of Management Information Systems ( email )

1810 N. 13th Street
Floor 2
Philadelphia, PA 19128
United States

Temple University - Department of Strategic Management ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States

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