Information Cascades and Threshold Implementation: An Application to Crowdfunding

96 Pages Posted: 4 Mar 2019 Last revised: 29 Apr 2021

See all articles by Lin William Cong

Lin William Cong

Cornell University - Samuel Curtis Johnson Graduate School of Management

Yizhou Xiao

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Multiple version iconThere are 2 versions of this paper

Date Written: April 15, 2021

Abstract

Economic interactions such as crowdfunding often involve sequential actions, observational learning, and project implementation contingent on achieving certain thresholds of support. We incorporate all-or-nothing thresholds in a canonical model of information cascade. We find that early supporters tap the wisdom of subsequent agents and effectively delegate their decisions to a ``gate-keeper,'' leading to uni-directional cascades and preventing herding on rejections. Consequently, project proposers or entrepreneurs can charge higher prices, with improved proposal feasibility, project selection, and information aggregation, even when agents can wait. Novel to the literature, equilibrium outcomes depend on the crowd size, and in the limit, endogenous threshold designs generate efficient project implementation and full information aggregation. Our key findings are robust to introducing contribution and learning costs, thresholds based on dollar amounts, or equilibrium selection issues.

Keywords: All-or-nothing, Capital Markets, Crowd-funding, Dynamic Learning, Entrepreneurship, FinTech Platform, Information Aggregation, Information Cascade

JEL Classification: D81, D83, G12, G14, L26

Suggested Citation

Cong, Lin and Xiao, Yizhou, Information Cascades and Threshold Implementation: An Application to Crowdfunding (April 15, 2021). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2019-30, Available at SSRN: https://ssrn.com/abstract=3345352 or http://dx.doi.org/10.2139/ssrn.3345352

Lin Cong (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

HOME PAGE: http://www.linwilliamcong.com/

Yizhou Xiao

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong

HOME PAGE: http://sites.google.com/site/yizhouxiao/

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