Fostering Entrepreneurship through Crowdfunding: What Drives Local Biases

50 Pages Posted: 7 Aug 2020 Last revised: 5 Jul 2024

See all articles by Jian Ni

Jian Ni

Virginia Tech - Pamplin College of Business

Yi Xin

California Institute of Technology (Caltech)

Fangzhu Yang

Johns Hopkins University

Date Written: April 1, 2020

Abstract

Small businesses and micro-entrepreneurs increasingly rely on crowdfunding platforms to raise funds for their entrepreneurial projects. While such a financing strategy enables entrepreneurs and funders to interact with fewer geographic constraints, we present empirical evidence consistent with strong local biases among funders in online crowdfunding markets. What drives these biases? Our results suggest that in addition to funders’ local preference, information frictions play a more important role in driving the local biases, preventing high-quality entrepreneurial projects from being identified and funded by investors outside their regions. Exploring the role of platform-design features, we find that, with the presence of strong local biases, not revealing locational information of projects could be welfare improving. Business strategies could be tailored for different project categories to help mitigate nonlocal funders’ informational disadvantages and foster local entrepreneurship.

Keywords: Crowdfunding, micro-entrepreneurship, local biases, information frictions

JEL Classification: L26, M13, D83

Suggested Citation

Ni, Jian and Xin, Yi and Yang, Fangzhu, Fostering Entrepreneurship through Crowdfunding: What Drives Local Biases (April 1, 2020). Available at SSRN: https://ssrn.com/abstract=3580585 or http://dx.doi.org/10.2139/ssrn.3580585

Jian Ni (Contact Author)

Virginia Tech - Pamplin College of Business ( email )

1016 Pamplin Hall
Blacksburg, VA 24061
United States

HOME PAGE: http://https://sites.google.com/site/jiannicmu/

Yi Xin

California Institute of Technology (Caltech) ( email )

Pasadena, CA 91125
United States

Fangzhu Yang

Johns Hopkins University ( email )

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