A Theory of Crowdfunding -A Mechanism Design Approach with Demand Uncertainty and Moral Hazard: Comment
Matthew Ellman () and
No 1012, Working Papers from Barcelona Graduate School of Economics
Strausz (2017) claims that crowdfunding implements the optimal mechanism design outcome in an environment with entrepreneurial moral hazard and private cost information. Unfortunately, his analysis, solution and claim depend critically on imposing an untenable condition (29) that he had explicitly discarded from his weak feasibility concept.1 This condition is essentially equivalent to ex post participation. We explain why it is inconsistent to assume consumers can opt out after learning the entrepreneur's cost structure in a model of fraud. We then study weak feasibility without the corresponding ex post participation constraint. We provide a simple example of a crowdfunding design that raises profit and welfare by tolerating some fraud risk. This shows how cross-subsidizing between cost states relaxes the most restrictive moral hazard constraints and generates better outcomes. We then characterize the optimal mechanism in the case of one consumer and two cost states. In general, this must hide information, including prices, from consumers. So crowdfunding cannot implement these optima.
Keywords: crowdfunding; mechanism design; moral hazard; private information (search for similar items in EconPapers)
JEL-codes: C72 D42 D81 D82 D86 L12 L26 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-des and nep-mic
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