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Some Simple Economics of Crowdfunding

In: Innovation Policy and the Economy, Volume 14

  • Ajay Agrawal
  • Christian Catalini
  • Avi Goldfarb

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 U.S., 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 non-equity 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.

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This chapter was published in:
  • Josh Lerner & Scott Stern, 2014. "Innovation Policy and the Economy, Volume 14," NBER Books, National Bureau of Economic Research, Inc, number lern13-1, October.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12946.
    Handle: RePEc:nbr:nberch:12946
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Web page: http://www.nber.org
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    1. Nanda, Ramana & Rhodes-Kropf, Matthew, 2013. "Investment cycles and startup innovation," Journal of Financial Economics, Elsevier, vol. 110(2), pages 403-418.
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    9. Ajay K. Agrawal & Christian Catalini & Avi Goldfarb, 2011. "The Geography of Crowdfunding," NBER Working Papers 16820, National Bureau of Economic Research, Inc.
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    13. Shane Greenstein & Feng Zhu, 2012. "Is Wikipedia Biased?," American Economic Review, American Economic Association, vol. 102(3), pages 343-48, May.
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