Learning from and Disclosing to the Crowd
33 Pages Posted: 5 Jul 2019
Date Written: July 3, 2019
We investigate the role of mandatory disclosure in crowdfunding markets. Our analysis identifies that crowdfunding provides a benefit for an entrepreneur to learn consumers' preferences before deciding whether to launch an innovative product. However, the crowdfunding market also features an under-implementation inefficiency, driven by two types of uncertainty that consumers face: fundamental uncertainty about the entrepreneur's implementation cost, and strategic uncertainty due to potential coordination failures among consumers. We find that, the mandatory disclosure of the implementation cost, although eliminates the fundamental uncertainty, may not necessarily mitigate the strategic uncertainty. We obtain a somewhat surprising result that, from an ex-ante perspective, mandating disclosure actually makes it even less likely for the entrepreneur to implement the new product than without disclosure, thus impairing efficiency.
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