IDEAS home Printed from https://ideas.repec.org/a/ucp/ipolec/doi10.1086-674021.html
   My bibliography  Save this article

Some Simple Economics of Crowdfunding

Author

Listed:
  • Ajay Agrawal
  • Christian Catalini
  • Avi Goldfarb

Abstract

It is not surprising that the financing of early-stage creative projects and ventures is typically geographically localized since these types of funding decisions are usually predicated on personal relationships and due diligence requiring face-to-face interactions in response to high levels of risk, uncertainty, and information asymmetry. So, to economists, the recent rise of crowdfunding--raising capital from many people through an online platform--which offers little opportunity for careful due diligence and involves not only friends and family but also many strangers from near and far, is initially startling. On the eve of launching equity-based crowdfunding, a new market for early-stage finance in the United States, we provide a preliminary exploration of its underlying economics. We highlight the extent to which economic theory, in particular transaction costs, reputation, and market design, can explain the rise of nonequity crowdfunding and offer a framework for speculating on how equity-based crowdfunding may unfold. We conclude by articulating open questions related to how crowdfunding may affect social welfare and the rate and direction of innovation.

Suggested Citation

  • Ajay Agrawal & Christian Catalini & Avi Goldfarb, 2014. "Some Simple Economics of Crowdfunding," Innovation Policy and the Economy, University of Chicago Press, vol. 14(1), pages 63-97.
  • Handle: RePEc:ucp:ipolec:doi:10.1086/674021
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1086/674021
    Download Restriction: Access to the online full text or PDF requires a subscription.

    File URL: http://dx.doi.org/10.1086/674021
    Download Restriction: Access to the online full text or PDF requires a subscription.

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Gregory Lewis, 2011. "Asymmetric Information, Adverse Selection and Online Disclosure: The Case of eBay Motors," American Economic Review, American Economic Association, vol. 101(4), pages 1535-1546, June.
    2. Nanda, Ramana & Rhodes-Kropf, Matthew, 2013. "Investment cycles and startup innovation," Journal of Financial Economics, Elsevier, vol. 110(2), pages 403-418.
    3. Shane Greenstein & Feng Zhu, 2012. "Is Wikipedia Biased?," American Economic Review, American Economic Association, vol. 102(3), pages 343-348, May.
    4. Samuel Lee & Petra Persson, 2016. "Financing from Family and Friends," Review of Financial Studies, Society for Financial Studies, vol. 29(9), pages 2341-2386.
    5. David H. Hsu, 2004. "What Do Entrepreneurs Pay for Venture Capital Affiliation?," Journal of Finance, American Finance Association, vol. 59(4), pages 1805-1844, August.
    6. Baldwin, Carliss & Hienerth, Christoph & von Hippel, Eric, 2006. "How user innovations become commercial products: A theoretical investigation and case study," Research Policy, Elsevier, vol. 35(9), pages 1291-1313, November.
    7. Ginger Zhe Jin & Andrew Kato, 2007. "Dividing Online and Offline: A Case Study," Review of Economic Studies, Oxford University Press, vol. 74(3), pages 981-1004.
    8. Eric von Hippel, 1998. "Economics of Product Development by Users: The Impact of "Sticky" Local Information," Management Science, INFORMS, vol. 44(5), pages 629-644, May.
    9. James W. Roberts, 2011. "Can Warranties Substitute for Reputations?," American Economic Journal: Microeconomics, American Economic Association, vol. 3(3), pages 69-85, August.
    10. Joel Waldfogel & Lu Chen, 2006. "DOES INFORMATION UNDERMINE BRAND? INFORMATION INTERMEDIARY USE AND PREFERENCE FOR BRANDED WEB RETAILERS -super-," Journal of Industrial Economics, Wiley Blackwell, vol. 54(4), pages 425-449, December.
    11. Catherine Tucker & Juanjuan Zhang, 2011. "How Does Popularity Information Affect Choices? A Field Experiment," Management Science, INFORMS, vol. 57(5), pages 828-842, May.
    12. Qin Lei, 2011. "FINANCIAL VALUE OF REPUTATION: EVIDENCE FROM THE eBAY AUCTIONS OF GMAIL INVITATIONS," Journal of Industrial Economics, Wiley Blackwell, vol. 59(3), pages 422-456, September.
    13. Seth Freedman & Ginger Zhe Jin, 2008. "Do Social Networks Solve Information Problems for Peer-to-Peer Lending? Evidence from Prosper.com," Working Papers 08-43, NET Institute.
    14. Ajay K. Agrawal & Christian Catalini & Avi Goldfarb, 2011. "The Geography of Crowdfunding," NBER Working Papers 16820, National Bureau of Economic Research, Inc.
    15. Luís Cabral & Ali Hortaçsu, 2010. "THE DYNAMICS OF SELLER REPUTATION: EVIDENCE FROM EBAY -super-," Journal of Industrial Economics, Wiley Blackwell, vol. 58(1), pages 54-78, March.
    16. Daniel W. Elfenbein & Ray Fisman & Brian Mcmanus, 2012. "Charity as a Substitute for Reputation: Evidence from an Online Marketplace," Review of Economic Studies, Oxford University Press, vol. 79(4), pages 1441-1468.
    17. Juanjuan Zhang & Peng Liu, 2012. "Rational Herding in Microloan Markets," Management Science, INFORMS, vol. 58(5), pages 892-912, May.
    Full references (including those not matched with items on IDEAS)

    More about this item

    JEL classification:

    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)
    • Z11 - Other Special Topics - - Cultural Economics - - - Economics of the Arts and Literature

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ucp:ipolec:doi:10.1086/674021. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Journals Division). General contact details of provider: http://www.journals.uchicago.edu/IPE/ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.