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The Geography of Crowdfunding

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  • Ajay K. Agrawal
  • Christian Catalini
  • Avi Goldfarb

Abstract

Perhaps the most striking feature of "crowdfunding" is the broad geographic dispersion of investors in small, early-stage projects. This contrasts with existing theories that predict entrepreneurs and investors will be co-located due to distance-sensitive costs. We examine a crowdfunding setting that connects artist-entrepreneurs with investors over the internet for financing musical projects. The average distance between artists and investors is about 3,000 miles, suggesting a reduced role for spatial proximity. Still, distance does play a role. Within a single round of financing, local investors invest relatively early, and they appear less responsive to decisions by other investors. We show this geography effect is driven by investors who likely have a personal connection with the artist-entrepreneur ("family and friends"). Although the online platform seems to eliminate most distance-related economic frictions such as monitoring progress, providing input, and gathering information, it does not eliminate social-related frictions.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16820.

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Date of creation: Feb 2011
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Handle: RePEc:nbr:nberwo:16820

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  1. Walter Powell & Kenneth Koput & James Bowie & Laurel Smith-Doerr, 2002. "The Spatial Clustering of Science and Capital: Accounting for Biotech Firm-Venture Capital Relationships," Regional Studies, Taylor and Francis Journals, vol. 36(3), pages 291-305.
  2. Erik Brynjolfsson & Yu (Jeffrey) Hu & Mohammad S. Rahman, 2009. "Battle of the Retail Channels: How Product Selection and Geography Drive Cross-Channel Competition," Management Science, INFORMS, vol. 55(11), pages 1755-1765, November.
  3. Blum, Bernardo S. & Goldfarb, Avi, 2006. "Does the internet defy the law of gravity?," Journal of International Economics, Elsevier, vol. 70(2), pages 384-405, December.
  4. Austin Nichols, 2003. "VINCENTY: Stata module to calculate distances on the Earth's surface," Statistical Software Components S456815, Boston College Department of Economics, revised 16 Feb 2007.
  5. Ali Hortaçsu & F. Asís Martínez-Jerez & Jason Douglas, 2009. "The Geography of Trade in Online Transactions: Evidence from eBay and MercadoLibre," American Economic Journal: Microeconomics, American Economic Association, vol. 1(1), pages 53-74, February.
  6. Ramana Nanda & Tarun Khanna, 2007. "Diasporas and Domestic Entrepreneurs: Evidence from the Indian Software Industry," Harvard Business School Working Papers 08-003, Harvard Business School, revised Feb 2009.
  7. Lerner, Josh, 1995. " Venture Capitalists and the Oversight of Private Firms," Journal of Finance, American Finance Association, vol. 50(1), pages 301-18, March.
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Cited by:
  1. Rubinton, Brian J, 2011. "Crowdfunding: disintermediated investment banking," MPRA Paper 31649, University Library of Munich, Germany.
  2. BELLEFLAMME, Paul & LAMBERT, Thomas & SCHWIENBACHER, Armin, 2011. "Crowdfunding: tapping the right crowd," CORE Discussion Papers 2011032, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Jonathan Meer & Oren Rigbi, 2012. "Transactions Costs and Social Distance in Philanthropy: Evidence from a Field Experiment," Working Papers 1205, Ben-Gurion University of the Negev, Department of Economics.

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