Biased Wisdom from the Crowd

Abstract

This paper studies information aggregation in common-value crowdfunding through the strategic choices of privately informed agents. A strategic substitution arises due to the consequentiality condition—an investment pledge matters only if total investment surpasses a funding threshold. In equilibrium, agents may invest despite their information suggesting otherwise, causing socially inefficient over-investments. While crowdfunding enables agents to benefit from collective wisdom, it fails to effectively extract it. Information aggregation is biased, favoring the endorsement of desirable projects over screening out undesirable ones, even as crowd size grows indefinitely. We further distinguish crowdfunding from voting and coordination games by comparing consequentiality with pivotality and regime-change conditions, and extend our model to account for private valuations, fixed funding goals, subscription costs, donations, and dynamic learning.

Keywords: Information Aggregation, Crowdfunding, Wisdom of the Crowd, Substitutability

JEL Classification: D82, D83, G29