Information Cascades and Threshold Implementation: Theory and An Application to Crowdfunding

Journal of Finance, Forthcoming

61 Pages Posted: 22 Feb 2018 Last revised: 11 Jan 2023

See all articles by Lin William Cong

Lin William Cong

Cornell University - Samuel Curtis Johnson Graduate School of Management; National Bureau of Economic Research (NBER)

Yizhou Xiao

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Multiple version iconThere are 3 versions of this paper

Date Written: January 14, 2023

Abstract

Economic interactions, such as crowdfunding, often involve sequential actions, observational learning, and contingent project implementation. We incorporate all-or-nothing thresholds in a canonical model of information cascades. Early supporters effectively delegate their decisions to a ``gatekeeper,'' resulting in uni-directional cascades without herding on rejections. Project proposers consequently can charge higher prices. Proposal feasibility, project selection, and information aggregation all improve, even when agents can wait. Equilibrium outcomes depend on the crowd size, and project implementation and information aggregation achieve efficiency in the large-crowd limit. Our key insights remain robust under thresholds in dollar amounts, alternative equilibrium selection, among other model extensions.

Keywords: All-or-nothing, Crowdaction, Entrepreneurship, FinTech, Information Aggregation, Platforms, Venture Capital

JEL Classification: D81, D83, G12, G14, L26

Suggested Citation

Cong, Lin and Xiao, Yizhou, Information Cascades and Threshold Implementation: Theory and An Application to Crowdfunding (January 14, 2023). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3030573 or http://dx.doi.org/10.2139/ssrn.3030573

Lin Cong

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

HOME PAGE: http://www.linwilliamcong.com/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yizhou Xiao (Contact Author)

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong

HOME PAGE: http://sites.google.com/site/yizhouxiao/

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