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The limits of crowdfunding with common values

Author

Listed:
  • Ellman, Matthew

    (Institute for Economic Analysis (CSIC) and Barcelona School of Economics)

  • Hurkens, Sjaak

    (Institute for Economic Analysis (CSIC) and BSE)

Abstract

This paper characterizes the efficiency limits of crowdfunding when investors can inspect quality after the profit-maximizing entrepreneur sets an aggregate threshold and individual return on investor bids. As the investor crowd grows large, crowdfunding asymptotically achieves the first-best if information is free. Informative bidding by a vanishing fraction of the crowd then almost certainly ensures full funding of good projects and none for bad ones. However, with positive information costs, bad projects necessarily get funded in proportion to the cost of precise information. Above a cost cut-off, crowdfunding adds nothing to standard investment contracts.

Suggested Citation

  • Ellman, Matthew & Hurkens, Sjaak, 0. "The limits of crowdfunding with common values," Theoretical Economics, Econometric Society.
    • Handle: RePEc:the:publsh:6910
    as

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    File URL: http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/6910/46851/1
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    More about this item

    Keywords

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    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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