Crowdfunding, Financing Constraints and Real Effects

Management Science, Forthcoming

40 Pages Posted: 29 Apr 2019

See all articles by Praveen Kumar

Praveen Kumar

University of Houston - Department of Finance

Nisan Langberg

University of Houston - C.T. Bauer College of Business; Tel Aviv University - Coller School of Management

David Zvilichovsky

Coller School of Management Tel Aviv University

Date Written: March 29, 2019

Abstract

We study the feasibility and optimal design of pre-sale crowdfunding contracts where participating consumers pay a premium above the future expected spot price and financially constrained entrepreneurs balance the potential product-market distortions introduced through pre-sale crowdfunding against the cost of traditional external financing. Our analysis shows how such crowdfunding contracts enable the execution of projects that could not be otherwise undertaken and highlights novel interactions between the cost of capital, demand uncertainty and production. Tighter financing constraints reduce the ability of the monopolist to extract surplus but, contrary to the usual result, may increase production. We evaluate how uncertainty and market size reduce the price-discriminating power of the monopolist and affect the optimal contract regime. Nevertheless, we show how such pre-sale price-discriminating contracts are implementable even when the number of potential consumers is relatively high and their individual demand is stochastic.

Keywords: Crowdfunding, Financing Platforms, Pivotal Contracts, Price Discrimination, Financing Constraints

JEL Classification: L1, G23, G32

Suggested Citation

Kumar, Praveen and Langberg, Nisan and Zvilichovsky, David, Crowdfunding, Financing Constraints and Real Effects (March 29, 2019). Management Science, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3364420

Praveen Kumar

University of Houston - Department of Finance ( email )

Houston, TX 77204
United States
713-743-4770 (Phone)
713-743-4789 (Fax)

Nisan Langberg

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

Tel Aviv University - Coller School of Management ( email )

Tel Aviv
Israel

David Zvilichovsky (Contact Author)

Coller School of Management Tel Aviv University ( email )

Tel Aviv University
Ramat Aviv, Tel Aviv, 69978
Israel

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