Financing Micro-entrepreneurship in Online Crowdfunding Markets: Local Preference versus Information Frictions

Abstract

Online crowdfunding platforms enable entrepreneurs and investors to interact with fewer geographic constraints and have become an important financing alternative for (micro-)entrepreneurship. However, local preference and information frictions could lead investors to overly focus on local projects, even when the non-local options are equally (if not more) attractive. This paper investigates the existence of local biases and the channels through which they are induced in crowdfunding marketplaces. We present empirical evidence consistent with strong local biases among investors. We also quantify the importance of information asymmetry and preference toward local projects on inducing local biases, and find that information asymmetry accounts for two-thirds of the total effect. Our results suggest that providing information about the projects through marketing might be a more efficient way to raise funds for micro-entrepreneurship as it mitigates non-local investors' informational disadvantages.

Keywords: Crowdfunding, Local Bias, Information Provision, (Micro-)entrepreneurship

JEL Classification: L26, M13, D83