Contingent Stimulus in Crowdfunding
54 Pages Posted: 3 Mar 2017 Last revised: 21 Aug 2017
Date Written: August 1, 2017
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: Suggested Citation