Crowdfunding investors, intermediaries and risky entrepreneurs

Eric Tassel ()
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Eric Tassel: Florida Atlantic University

Small Business Economics, 2023, vol. 60, issue 3, No 9, 1033-1050

Abstract: Abstract In this paper, we consider a two-period model where individual investors supply funds to entrepreneurs either indirectly, through a financial intermediary, or directly, using equity crowdfunding. The entrepreneurs vary in terms of the quality of their business projects and ex ante, both the investors and intermediaries are imperfectly informed about their types. The main trade off between the two forms of investment is that crowdfunding is assumed to involve lower costs and higher risk relative to how intermediaries invest their funds. Given this framework, we study investor behavior and find that at intermediate levels of risk for the crowdfunding investment, investors elect to utilize both crowdfunding and financial intermediation in equilibrium. Furthermore, we find that when transaction costs of investment are high, as can be the case with opaque types of small business ventures, this increases the incidence of crowdfunding as the optimal form of investment.

Keywords: Equity crowdfunding; Small business finance; Banks; Asymmetric information (search for similar items in EconPapers)
JEL-codes: D82 G20 G32 L26 M13 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s11187-022-00622-9

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