Designing Rewards-Based Crowdfunding Campaigns for Strategic (but Distracted) Contributors

Abstract

In rewards-based crowdfunding, entrepreneurs solicit donations from a large number of individual contributors. If total donations exceed a prespecified funding target, the entrepreneur distributes non-monetary rewards to contributors; otherwise, their donations are refunded. We study how to design such campaigns when contributors choose not just whether to contribute, but also when to contribute. We show that strategic contribution behavior—when contributors intentionally delay until campaign success is likely—can arise from the combination of non-refundable (potentially very small) hassle costs and the risk of campaign failure, and can explain pledging patterns commonly observed in crowdfunding. Furthermore, such delays do not hurt the entrepreneur if contributors are perfectly rational, but they do if contributors are distracted, i.e., if they might fail to return to the campaign after an intentional delay. To mitigate this, we find that an entrepreneur can use a simple menu of rewards with a fixed number of units sold at a low price, and an unlimited number sold at a higher price; this segments contributors over time based on the information they observe upon arrival. We show that, despite its simplicity, under many conditions such a menu performs well compared to a theoretically optimal menu consisting of an infinite number of different rewards and price levels. Lastly, we experimentally validate our model assumptions and theoretical insights by studying pledging behavior of participants in simulated crowdfunding campaigns.

Keywords: analytical modeling; electronic commerce; laboratory experiments; crowdfunding

JEL Classification: C72, C73, D90, D83, M13