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

Timothy Cason, Alexander Tabarrok and Robertas Zubrickas

Purdue University Economics Working Papers from Purdue University, Department of Economics

Abstract: Crowdfunding can suffer from information asymmetry, leaving some investors disappointed with low-quality projects while 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 (search for similar items in EconPapers)
JEL-codes: C72 C90 D82 G23 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2024-05
New Economics Papers: this item is included in nep-exp, nep-mac and nep-pay
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Persistent link: https://EconPapers.repec.org/RePEc:pur:prukra:1339

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