Optimal Disclosure on Crowdfunding Platforms

Abstract

We study a trade-off between innovation and investor protection on reward-based crowdfunding platforms. Informing investors about the risks of an investment opportunity protects them from failure, but comes at the cost of dissuading innovation. We show that a regulator, who values investor protection, may find it optimal to choose disclosure requirements that are not fully informative about projects. Partial disclosure enables investors to commit to sometimes funding bad projects, encouraging further innovation. We provide conditions under which a profit-motivated platform sets regulator-optimal disclosure requirements and study substitutability between regulation of disclosure and reputation systems.

Keywords: Crowdfunding, Reputation, Information Disclosure, Information Design, Bayesian Persuasion

JEL Classification: D47, D80, D82, L15, L20, L51