On the Role of Provision Points in Online Crowdfunding

Forthcoming, Journal of Management Information Systems

36 Pages Posted: 30 Oct 2017 Last revised: 15 Jan 2018

Gordon Burtch

University of Minnesota - Twin Cities - Carlson School of Management

Yili Hong

Arizona State University (ASU) - W.P. Carey School of Business

De Liu

University of Minnesota - Minneapolis

Date Written: September 23, 2017

Abstract

Extending recent work on market mechanisms in new fintech offerings, we explore the implications of a key mechanism in online crowdfunding – the use of a provision point. Under a provision point mechanism (otherwise known as all-or-nothing or fixed fundraising scheme), the fundraiser, typically an entrepreneur, only receives funds pledged toward his or her campaign if a pre-registered fundraising target is met, rather than keeping everything that is raised. On the one hand, provision points may weaken contributors’ reliance on prior capital accumulation for judging a project’s potential for success, by eliminating their concerns about a partial fundraising outcome and by signaling the project or entrepreneur’s quality. On the other hand, provision points may induce a stronger reliance on prior capital accumulation by imposing a positive externality among contributors; the materialization of a contributor’s contribution depends explicitly on having enough contribution from others. We assess this tension empirically, examining a proprietary data set from a leading global reward-based crowdfunding platform that allows entrepreneurs to choose whether to apply a provision point. We separately consider the effects of prior capital accumulation on campaign visitors’ conversion and contribution behaviors, and how the effects shift in the presence of a provision point at different stages of the campaign lifecycle. Provision points are found to significantly weaken the association between prior capital accumulation and visitor conversion, implying a reduction in the potential for herd behavior or informational cascades.

Keywords: crowdfunding, mechanism design, fintech, provision point mechanism, social proof

JEL Classification: G21, G24, G32, L26

Suggested Citation

Burtch, Gordon and Hong, Yili and Liu, De, On the Role of Provision Points in Online Crowdfunding (September 23, 2017). Forthcoming, Journal of Management Information Systems. Available at SSRN: https://ssrn.com/abstract=3061228 or http://dx.doi.org/10.2139/ssrn.3061228

Gordon Burtch (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Yili Hong

Arizona State University (ASU) - W.P. Carey School of Business ( email )

Tempe, AZ 85287-3706
United States

HOME PAGE: http://my.wpcarey.asu.edu/directory/people/profile.cfm?person=2255148

De Liu

University of Minnesota - Minneapolis ( email )

110 Wulling Hall, 86 Pleasant St, S.E.
308 Harvard Street SE
Minneapolis, MN 55455
United States

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