 The Limits of Crowdfunding with Common ValuesSjaak Hurkens and Matthew Ellman No 1477, Working Papers from Barcelona School of Economics Abstract: This paper establishes efficiency bounds on debt, equity, and reward-based crowd- funding in common value settings. We characterize optimal welfare and profit out- comes in the limit as the crowd of funders grows large. An entrepreneur sets a threshold and rate of return on investments in a risky project with constant returns to scale. Funders can inspect the project at a cost before choosing whether to bid to invest. The entrepreneur's design choices affect inspection, bidding and information aggregation ("crowdblessing"). With costless information acquisition, crowdfunding asymptotically achieves the first-best because informative bidding by a vanishing fraction of the crowd can ensure certain funding of good projects while excluding all bad ones. However, costly inspection precludes efficiency: to incentivize inspection, entrepreneurs lower thresholds so that some bad projects get funded. This inefficiency rises linearly with cost and falls with precision. Above a critical cost, crowdfunding offers no advantage over standard investment contracts. Keywords: asymptotic efficiency; common value; information acquisition; information aggregation; wisdom of crowds (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bge:wpaper:1477 Access Statistics for this paper More papers in Working Papers from Barcelona School of Economics Contact information at EDIRC. |
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