Contingent Stimulus in Crowdfunding

54 Pages Posted: 3 Mar 2017 Last revised: 21 Aug 2017

See all articles by Longyuan Du

Longyuan Du

University of Toronto - Rotman School of Management

Ming Hu

University of Toronto - Rotman School of Management

Jiahua Wu

Imperial College Business School

Date Written: August 1, 2017

Abstract

Archimedes once said "give me a fulcrum, and I shall move the world." In this paper, we study the optimal timing of contingently placing a "fulcrum" in the context of crowdfunding, with the potential of tilting the random pledging process from failure to success. Specifically, we consider a model where backers arrive sequentially at a crowdfunding project. Upon arrival, a backer makes her pledging decision by taking into account the expected success of the project. We characterize the dynamics of a project's pledging process. In particular, we show that there exists a "cascade effect" on backers' pledging, which is mainly driven by the all-or-nothing nature of crowdfunding projects. According to our data collected from the most popular online crowdfunding platform, the majority of projects fail to achieve their goals. To address this issue, we propose three contingent stimulus policies, namely, seeding, feature upgrade and limited-time offer. We show that the optimal stimulus policies have a cutoff-time structure. The static heuristic policies obtained from solving the deterministic counterpart are asymptotically optimal when the problem is scaled up. However, the profit loss from the static heuristic can have an order of magnitude higher than the square root of the scale parameter--the typical order in loss from deterministic heuristics in other operations settings. This result underscores the importance of implementing contingent policies in crowdfunding. Lastly, we show that the benefit of contingent policies is greatest in the middle of crowdfunding campaigns. Testing with the data set of Kickstarter, we obtain empirical evidence that the projects' success rates improve by 14.6% on average with updates in the middle of the campaign and when the pledging progress is lagging.

Keywords: crowdfunding, dynamic policy, deterministic heuristic, asymptotic optimality, revenue management

JEL Classification: C73

Suggested Citation

Du, Longyuan and Hu, Ming and Wu, Jiahua, Contingent Stimulus in Crowdfunding (August 1, 2017). Rotman School of Management Working Paper No. 2925962. Available at SSRN: https://ssrn.com/abstract=2925962 or http://dx.doi.org/10.2139/ssrn.2925962

Longyuan Du

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Ming Hu (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George st
Toronto, ON M5S 3E6
Canada
416-946-5207 (Phone)

HOME PAGE: http://ming.hu

Jiahua Wu

Imperial College Business School ( email )

Tanaka Building
South Kensington Campus
London, SW7 2AZ
United Kingdom
02075949851 (Phone)

HOME PAGE: http://www3.imperial.ac.uk/people/j.wu

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