A Theory of Crowdfunding - a mechanism design approach with demand uncertainty and moral hazard

Roland Strausz

No 11222, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Crowdfunding provides the innovation that it enables entrepreneurs to contract with consumers before the investment. Under aggregate demand uncertainty, this improves screening for valuable projects. Entrepreneurial moral hazard threatens this benefit. Studying the subsequent trade-off between screening and moral hazard, the paper characterizes optimal mechanisms. Popular all-or-nothing reward-crowdfunding schemes reflect their salient features. Efficiency is sustainable only if returns exceed investment costs by a margin reflecting the degree of moral hazard. Constrained efficient mechanisms exhibit underinvestment. As a screening tool for valuable projects, crowdfunding promotes social welfare. Crowdfunding complements rather than substitutes traditional entrepreneurial financing.

Keywords: Crowdfunding; entrepreneurship; Moral hazard; Aggregate demand uncertainty; Venture capital (search for similar items in EconPapers)
JEL-codes: D82 G32 L11 M31 (search for similar items in EconPapers)
Date: 2016-04
New Economics Papers: this item is included in nep-cta, nep-ent, nep-mic and nep-ppm
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Citations: View citations in EconPapers (6)

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Related works:
Journal Article: A Theory of Crowdfunding: A Mechanism Design Approach with Demand Uncertainty and Moral Hazard (2017)
Working Paper: A Theory of Crowdfunding - A Mechanism Design Approach with Demand Uncertainty and Moral Hazard (2016)
Working Paper: A Theory of Crowdfunding - a mechanism design approach with demand uncertainty and moral hazard (2015)
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