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The Limits of Crowdfunding with Common Values

Author

Listed:
  • Sjaak Hurkens
  • Matthew Ellman

Abstract

This paper establishes efficiency bounds on debt, equity, and reward-based crowd- funding in common value settings. We characterize optimal welfare and profit out- comes in the limit as the crowd of funders grows large. An entrepreneur sets a threshold and rate of return on investments in a risky project with constant returns to scale. Funders can inspect the project at a cost before choosing whether to bid to invest. The entrepreneur's design choices affect inspection, bidding and information aggregation ("crowdblessing"). With costless information acquisition, crowdfunding asymptotically achieves the first-best because informative bidding by a vanishing fraction of the crowd can ensure certain funding of good projects while excluding all bad ones. However, costly inspection precludes efficiency: to incentivize inspection, entrepreneurs lower thresholds so that some bad projects get funded. This inefficiency rises linearly with cost and falls with precision. Above a critical cost, crowdfunding offers no advantage over standard investment contracts.

Suggested Citation

  • Sjaak Hurkens & Matthew Ellman, 2025. "The Limits of Crowdfunding with Common Values," Working Papers 1477, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:1477
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    References listed on IDEAS

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    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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