Fostering Entrepreneurship through Crowdfunding: What Drives Local Biases

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