The Promise of Reward Crowdfunding

Abstract

We study reward crowdfunding, the most innovative segment of the crowdfunding market, where, instead of a debt or equity contract, fund providers are promised some good or service in the future in exchange for their contribution to the funding of the investment project under a contract that does not penalize the creator's failure to deliver. The existing economic and legal literature is puzzled by the platforms use of this seemingly inefficient contract where a standard pre-sale contract would appear to work better. Counter intuitively, we prove that the no-penalty contract is the optimal contract between creators of unknown talent and early adopters of their products when creators can benefit from being discovered as talented and from the goodwill generated by delivering on their promise to early adopters. Our analysis has important policy implications on how backers should be protected. Standard measures of consumer or investor protection may be counterproductive.

Keywords: Reward crowdfunding, best efforts, presale contract, talent discovery

JEL Classification: G23, G24, K22