Crowd Sourcing in Capital Formation: An Empirical Investigation

Financial institutions arise in the presence of market imperfections such as information asymmetry. Recently a new type of institution has emerged, crowd funders. These entities: 1) channel funds to create intellectual property; 2) gather information on the quality of the project and the entrepreneur; and 3) gauge demand information directly from individuals to improve the efficiency of capital allocation. Data from crowd funder Kickstarter allow new insight on capital formation and entrepreneurial venture contracting. A crucial advantage is that this database reports all cases where entrepreneurs try and fail to raise funds, a feature impossible to observe in most other data sources. This paper empirically examines the determinants of contractual outcomes in reward-based crowd funding, with an emphasis on the role played by entrepreneur reputation and reputation formation