The Real Effects of Transparency in Crowdfunding
53 Pages Posted: 5 Jul 2019 Last revised: 17 Nov 2020
Date Written: October 29, 2019
We investigate the real effects of information transparency in crowdfunding markets. Our analysis identifies that crowdfunding provides a benefit for an entrepreneur to learn consumers' preferences before deciding whether to implement an innovative project. 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 greater transparency regarding the implementation cost, although diminishes the fundamental uncertainty, may not necessarily mitigate the strategic uncertainty. We obtain a somewhat surprising result that, from an ex ante perspective, greater transparency actually makes the under-implementation problem even worse, thus impairing efficiency.
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