Unleashing the Crowd: the Effect of Social Networks in Crowdfunding Markets

76 Pages Posted: 14 Dec 2020 Last revised: 15 Feb 2024

See all articles by Lin Peng

Lin Peng

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Linyi Zhang

The Chinese University of Hong Kong, Shenzhen

Date Written: June 24, 2023

Abstract

We identify the crucial role social networks play in crowdfunding markets. Investors are 50% more likely to fund projects that their peers support and are 11.2% more likely to fund projects from regions where they share strong social ties, given a one standard deviation change in the variables. More influential peers exert a greater influence, especially in the case of riskier projects, and the peer effects are amplified in crowdfunding platforms that prioritize transparency and accountability. Social ties transmit information about economic conditions in project locations, and they complement the influence of peer effects. Furthermore, the social network effects affect project funding outcomes and can be particularly valuable in mitigating the adverse impact of natural disasters. Our findings suggest that social networks play a significant role in crowdfunding markets by increasing investor awareness, disseminating information, and ultimately influencing capital allocations.

Keywords: social network, peer effects, social learning, crowdfunding, social proximity to crowdfunding capital (SPCC), fintech, platform design

JEL Classification: D83, G2, G23, L26

Suggested Citation

Peng, Lin and Zhang, Linyi, Unleashing the Crowd: the Effect of Social Networks in Crowdfunding Markets (June 24, 2023). Available at SSRN: https://ssrn.com/abstract=3747375 or http://dx.doi.org/10.2139/ssrn.3747375

Lin Peng (Contact Author)

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States

Linyi Zhang

The Chinese University of Hong Kong, Shenzhen ( email )

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