Unleashing the Crowd: the Effect of Social Networks in Crowdfunding Markets
76 Pages Posted: 14 Dec 2020 Last revised: 15 Feb 2024
Date Written: June 24, 2023
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: Suggested Citation