Information Cascades and Threshold Implementation: Theory and An Application to Crowdfunding
96 Pages Posted: 22 Feb 2018 Last revised: 28 May 2021
Date Written: April 15, 2021
Economic interactions such as crowdfunding often involve sequential actions, observational learning, and project implementation contingent on achieving certain thresholds of support. We incorporate all-or-nothing thresholds in a canonical model of information cascade. We find that early supporters tap the wisdom of subsequent agents and effectively delegate their decisions to a ``gate-keeper,'' leading to uni-directional cascades and preventing herding on rejections. Consequently, project proposers or entrepreneurs can charge higher prices, with improved proposal feasibility, project selection, and information aggregation, even when agents can wait. Novel to the literature, equilibrium outcomes depend on the crowd size, and in the limit, endogenous threshold designs generate efficient project implementation and full information aggregation. Our key findings are robust to introducing contribution and learning costs, thresholds based on dollar amounts, or equilibrium selection issues.
Keywords: All-or-nothing, Capital Markets, Crowd-funding, Dynamic Learning, Entrepreneurship, FinTech Platform, Information Aggregation, Information Cascade.
JEL Classification: D81, D83, G12, G14, L26
Suggested Citation: Suggested Citation