Fund What You Trust? Social Capital and Moral Hazard in Crowdfunding

65 Pages Posted: 20 Dec 2017 Last revised: 5 Aug 2018

See all articles by Tse-Chun Lin

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics

Vesa Pursiainen

The University of Hong Kong - Faculty of Business and Economics; University of Zurich - Department of Banking and Finance

Date Written: July 31, 2018

Abstract

We study whether social capital mitigates moral hazard in crowdfunding. We construct a yearly index of social capital for all U.S. counties and combine it with a near-comprehensive sample of Kickstarter campaigns. Our results show a strong positive correlation between the social capital of the entrepreneur's home county and the campaign performance. For identification, we exploit a quasi-experiment based on a Kickstarter rule change that helps reduce the magnitude of moral hazard. We find that this rule change is associated with a significant reduction in the effect of social capital on campaign outcomes. In addition, the results are stronger for campaigns that are more vulnerable to moral hazard – as proxied by entrepreneur, regional, and campaign characteristics – and in times of high economic uncertainty and low sentiment. Overall, our findings suggest that crowdfunding campaigns benefit from social capital via the alleviation of moral hazard concerns.

Keywords: crowdfunding, moral hazard, social capital, trust, kickstarter

JEL Classification: D22, D81, G02, G23, L26

Suggested Citation

Lin, Tse-Chun and Pursiainen, Vesa, Fund What You Trust? Social Capital and Moral Hazard in Crowdfunding (July 31, 2018). Available at SSRN: https://ssrn.com/abstract=3088905 or http://dx.doi.org/10.2139/ssrn.3088905

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Vesa Pursiainen (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Hong Kong
Hong Kong

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

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