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Optimal crowdfunding design

Matthew Ellman and Sjaak Hurkens

Journal of Economic Theory, 2019, vol. 184, issue C

Abstract: This paper characterizes profit- and welfare-maximizing reward-based crowdfunding, defined by an aggregate funding threshold for production. We disentangle crowdfunding's selling and funding roles, locating its key benefit in its market test role of adapting production to demand. Multiple prices prove necessary for effective learning and adaptation, even with relatively large crowds. Mechanism design proves general optimality in our baseline and shows the value of limiting reward quantities. Funding is not fundamental and crowdfunding may even complement traditional finance. We characterize welfare consequences, model price dynamics and identify platform designs and regulations that enhance innovation and social benefits.

Keywords: Crowdfunding; Mechanism design; Entrepreneurial finance; Market-testing; Adaptation; Rent-extraction (search for similar items in EconPapers)
JEL-codes: C72 D42 L12 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.jet.2019.104939

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