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Crowdfunding investors, intermediaries and risky entrepreneurs

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  • Eric Tassel

    (Florida Atlantic University)

Abstract

In this paper, we consider a two-period model where individual investors supply funds to entrepreneurs either indirectly, through a financial intermediary, or directly, using equity crowdfunding. The entrepreneurs vary in terms of the quality of their business projects and ex ante, both the investors and intermediaries are imperfectly informed about their types. The main trade off between the two forms of investment is that crowdfunding is assumed to involve lower costs and higher risk relative to how intermediaries invest their funds. Given this framework, we study investor behavior and find that at intermediate levels of risk for the crowdfunding investment, investors elect to utilize both crowdfunding and financial intermediation in equilibrium. Furthermore, we find that when transaction costs of investment are high, as can be the case with opaque types of small business ventures, this increases the incidence of crowdfunding as the optimal form of investment.

Suggested Citation

  • Eric Tassel, 2023. "Crowdfunding investors, intermediaries and risky entrepreneurs," Small Business Economics, Springer, vol. 60(3), pages 1033-1050, March.
    • Handle: RePEc:kap:sbusec:v:60:y:2023:i:3:d:10.1007_s11187-022-00622-9
    DOI: 10.1007/s11187-022-00622-9
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    More about this item

    Keywords

    Equity crowdfunding; Small business finance; Banks; Asymmetric information;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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