Sequential Fundraising and Mutual Insurance

Amir Ban and Moran Koren

Papers from arXiv.org

Abstract: Seed fundraising for ventures often takes place by sequentially approaching potential contributors, who make observable decisions. The fundraising succeeds when a target number of investments is reached. Though resembling classic information cascades models, its behavior is radically different, exhibiting surprising complexities. Assuming a common distribution for contributors' levels of information, we show that participants rely on {\em mutual insurance}, i.e., invest despite unfavorable information, trusting future player strategies to protect them from loss. {\em Delegation} occurs when contributors invest unconditionally, empowering the decision to future players. Often, all early contributors delegate, in effect empowering the last few contributors to decide the outcome. Similar dynamics hold in sequential voting, as in voting in committees.

Date: 2020-05, Revised 2021-12
New Economics Papers: this item is included in nep-ias
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