Crowdfunding, demand uncertainty, and moral hazard: A mechanism design approach

Roland Strausz

No 2015-036, SFB 649 Discussion Papers from Humboldt University Berlin, Collaborative Research Center 649: Economic Risk

Abstract: Crowdfunding challenges the traditional separation between finance and marketing. It creates economic value by reducing demand uncertainty, which enables a better screening of positive NPV projects. Entrepreneurial moral hazard threatens this effect. Using mechanism design, mechanisms are characterized that induce efficient screening, while preventing moral hazard. "All-or-nothing" reward-crowdfunding platforms reflect salient features of these mechanisms. Efficiency is sustainable only if expected gross returns exceed twice expected investment costs. Constrained efficient mechanisms exhibit underinvestment. With limited consumer reach, crowdfunders become actual investors. Crowdfunding complements rather than substitutes traditional entrepreneurial financing, because each financing mode displays a different strength.

Keywords: crowdfunding; finance; marketing; demand uncertainty; moral hazard (search for similar items in EconPapers)
JEL-codes: D82 G32 L11 M31 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:sfb649:sfb649dp2015-036

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