Crowdfunding pricing and quality overstatement in the presence of platform regulation

Nowadays entrepreneurs often overstate their product quality to induce more backers to participate in crowdfunding. The platform will implement regulations and guidelines that penalize entrepreneurs who lie to or mislead backers. We develop a game-theoretical model to study the interactions between dishonest entrepreneurs, pivotal backers, and platform regulations. We find that entrepreneurs tend to exaggerate quality because it increases their profits and the feasible set of crowdfunding projects. Under the platform regulation, entrepreneurs can claim quality as high as an unpunished level. Specifically, when the product development success rate is relatively high, regulations can decrease entrepreneurs’ profits and increase backer surplus. However, for projects with a relatively low success rate, regulating with penalties only does not work. Moreover, we extend our model to an interesting scenario and find that the combined use of penalties and deferred payment mechanisms can reduce the level of quality overstatement further. Our findings help explain why most entrepreneurs in the crowdfunding market tend to make false claims about their products and why crowdfunding platforms implement deferred payments to prevent entrepreneurs from exaggerating quality.