Market Imperfections and Crowdfunding

This paper offers a model of crowdfunding that represents a growing area of interest among practitioners and theorists. It is one of the first articles analyzing the choice between the different types of crowdfunding (reward-based vs. equity-based) and the choice between crowdfunding and traditional financing. The model is based on standard market imperfections such as asymmetric information and moral hazard as well as on some specific features of crowdfunding including the market feedback regarding new projects. The model provides several implications, most of which have not yet been tested. For example, we find that when asymmetric information is important, high-quality projects prefer reward-based crowdfunding. The choice of an all-or-nothing mechanism as opposed to a keep-it-all can serve as a signal of a firm's quality ("signalling by risk-bearing"). Crowdfunding is selected over a traditional bank loan if the demand for the product is either very small or very large