A Theory of Crowdfunding — A Mechanism Design Approach with Demand Uncertainty and Moral Hazard: Comment

20 Pages Posted: 3 Jan 2018 Last revised: 10 Jan 2018

See all articles by Matthew Ellman

Matthew Ellman

Institut d'Anàlisi Econòmica (CSIC); Barcelona Graduate School of Economics (Barcelona GSE)

Sjaak Hurkens

Institute for Economic Analysis-CSIC; Barcelona GSE

Date Written: December 28, 2017

Abstract

Strausz (2017) claims that crowdfunding implements the optimal mechanism design outcome in an environment with entrepreneurial moral hazard and private cost information. Unfortunately, his analysis, solution and claim depend critically on imposing an untenable condition (29) that he had explicitly discarded from his weak feasibility concept. This condition is essentially equivalent to ex post participation. We explain why it is inconsistent to assume consumers can opt out after learning the entrepreneur's cost structure in a model of fraud. We then study weak feasibility without the corresponding ex post participation constraint. We provide a simple example of a crowdfunding design that raises profit and welfare by tolerating some fraud risk. This shows how cross-subsidizing between cost states relaxes the most restrictive moral hazard constraints and generates better outcomes. We then characterize the optimal mechanism in the case of one consumer and two cost states. In general, this must hide information, including prices, from consumers. So crowdfunding cannot implement these optima.

Keywords: Crowdfunding, mechanism design, moral hazard, private information

JEL Classification: C72, D42, D81, D82, D86, L12, L26

Suggested Citation

Ellman, Matthew and Hurkens, J.P.M. (Sjaak), A Theory of Crowdfunding — A Mechanism Design Approach with Demand Uncertainty and Moral Hazard: Comment (December 28, 2017). Available at SSRN: https://ssrn.com/abstract=3094034 or http://dx.doi.org/10.2139/ssrn.3094034

Matthew Ellman

Institut d'Anàlisi Econòmica (CSIC) ( email )

UAB Campus
IAE-CSIC
E-08193 Bellaterra, Barcelona 08193
Spain
0034935806612 (Phone)

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

J.P.M. (Sjaak) Hurkens (Contact Author)

Institute for Economic Analysis-CSIC

campus UAB
Bellaterra, 08193
Spain

Barcelona GSE ( email )

Barcelona
Spain
(34-93) 5806612 (Phone)
(34-93) 5801452 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
168
Abstract Views
777
Rank
341,187
PlumX Metrics