Signaling Quality: How Refund Bonuses Can Overcome Information Asymmetries in Crowdfunding

Timothy Cason, Alex Tabarrok () and Robertas Zubrickas ()
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Alex Tabarrok: Department of Economics and Center for Study of Public Choice, George Mason University, Fairfax, Virginia 22030
Robertas Zubrickas: Department of Economics, University of Bath, Bath BA2 7AY, United Kingdom; and Faculty of Economics and Business Administration, Vilnius University, 10105 Vilnius, Lithuania

Management Science, 2025, vol. 71, issue 7, 5933-5947

Abstract: Crowdfunding can suffer from information asymmetry, leaving some investors disappointed with low-quality projects, whereas other high-quality projects remain unfunded. We show that refund bonuses, which provide investors a payment if a fundraising campaign is unsuccessful, can signal project quality and help overcome the market failure in crowdfunding. Because strong projects have a lower risk of bonus payout, entrepreneurs with strong projects are more likely to offer bonuses. This signals high quality to investors, and due to their updated beliefs, this drives investment toward such projects. An experiment provides supporting empirical evidence for the benefits of this signaling solution to the problems of information asymmetry in crowdfunding.

Keywords: crowdfunding; threshold implementation; adverse selection; experiments; signaling (search for similar items in EconPapers)
Date: 2025
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http://dx.doi.org/10.1287/mnsc.2023.03923 (application/pdf)

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Working Paper: Signaling Quality: How Refund Bonsues Can Overcome Information Asymmetries in Crowdfunding (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:71:y:2025:i:7:p:5933-5947

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