Designing Rewards-Based Crowdfunding Campaigns for Strategic Contributors
37 Pages Posted: 10 Sep 2018
Date Written: August 28, 2018
In rewards-based crowdfunding, an entrepreneur designs a fundraising campaign that distributes non-monetary rewards to contributors for donating funds. The most popular crowdfunding platforms, such as Kickstarter, use a “fixed funding” mechanism: if the total money raised is less than a prespecified funding target, the campaign fails, the contributors are refunded their pledges and the entrepreneur does not deliver rewards. In this paper, we study how to design such a campaign when sequentially arriving contributors incur a non-refundable hassle cost while pledging, giving them an incentive to behave strategically by waiting until success is likely or certain before participating. When the entrepreneur is restricted to listing a single reward, we show that such strategic behavior both reduces profit and can explain pledging patterns commonly observed in crowdfunding. To mitigate this, we find that an entrepreneur can use a simple menu of rewards in which a fixed number of units are sold at low price, and an unlimited number are sold at a higher price; this segments contributors over time based on the information observed upon arrival to the campaign. We analyze the performance of this simple menu and find that, despite its simplicity, it is effective at eliminating strategic behavior and performs well compared to a theoretically optimal menu consisting of an infinite number of different rewards and price levels, particularly when contributors have high valuations for rewards, face low hassle cost when pledging, or when the entrepreneur faces low fixed start-up costs.
Keywords: strategic consumers, rewards-based crowdfunding, fixed funding
JEL Classification: C72, C73, D90, D83, M13
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