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Entrepreneurial Learning and Disincentives in Crowdfunding Markets

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  • Yan Xu

    (Department of Marketing, Pamplin College of Business, Virginia Tech, Blacksburg, Virginia 24060)

  • Jian Ni

    (Carey Business School, Johns Hopkins University, Baltimore, Maryland 21202)

Abstract

Reward-based crowdfunding has enabled entrepreneurs to interact with consumers even before product launches. However, this market persistently suffers from a high failure rate; that is, entrepreneurs fail to launch and deliver their products as promised. We investigate the extent to which this high failure rate is because of information distortion—entrepreneurs have uncertainty about consumers’ evaluation of the new products. We model the product launch decisions of different types of entrepreneurs who raise funds through preselling on reward-based crowdfunding platforms and subsequently decide whether to continue with the product launch. To do so, we collect structured and unstructured data from Kickstarter’s digital video game category and classify attributes using supervised learning methods. We develop and estimate an integrated model of crowdfunding demand and entrepreneurs’ product launch decisions. We find that the information entrepreneurs gather from crowdfunding sales has sizable impacts on the product launch decisions of entrepreneurs with low managerial capital or new to the crowdfunding platform. Our counterfactual simulations suggest that platform policy regulating overfunded projects can reduce the product launch failure rate by about 13%.

Suggested Citation

  • Yan Xu & Jian Ni, 2022. "Entrepreneurial Learning and Disincentives in Crowdfunding Markets," Management Science, INFORMS, vol. 68(9), pages 6819-6864, September.
    • Handle: RePEc:inm:ormnsc:v:68:y:2022:i:9:p:6819-6864
    DOI: 10.1287/mnsc.2021.4248
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    1. Avi Goldfarb & Mo Xiao, 2024. "Transitory shocks, limited attention, and a firm’s decision to exit," Quantitative Marketing and Economics (QME), Springer, vol. 22(3), pages 223-255, September.
    2. Chao Xing & Yuming Zhang & David Tripe, 2024. "Ethical Consumers and Low-Income Sellers on China’s Reward-Based Crowdfunding Platforms: Are Poverty Alleviation Campaigns More Successful?," Journal of Business Ethics, Springer, vol. 191(4), pages 793-810, May.

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