Discussion Paper No. 2
November 2, 2021
A Theory of Crowdfunding
Author:
Abstract:
Crowdfunding provides innovation in enabling entrepreneurs to contract with consumers before investment. Under aggregate demand uncertainty, this improves screening for valuable projects. Entrepreneurial moral hazard and private cost in- formation threatens this benefit. Crowdfunding’s after-markets enable consumers to actively implement deferred payments and thereby manage moral hazard. Popular crowdfunding platforms offer schemes that allow consumers to do so through con- ditional pledging behavior. Efficiency is sustainable only if expected returns exceed an agency cost associated with the entrepreneurial incentive problems. By reducing demand uncertainty, crowdfunding promotes welfare and complements traditional entrepreneurial financing, which focuses on controlling moral hazard.
Keywords:
crowdfunding; entrepreneurship; moral hazard; demand uncertainty;
JEL-Classification: