The limits of crowdfunding with common values

This paper establishes the efficiency limits of crowdfunding in the common value case. An entrepreneur sets a threshold and rate of return on investments in a risky project with constant returns to scale. Investors can inspect the project at a cost, before choosing whether to bid to invest. We characterize optimal welfare and profit in the limit as the crowd of investors grows large. With costless information acquisition, crowdfunding asymptotically achieves the first-best because informative bidding by a vanishing fraction of the crowd can ensure almost certain funding success for good projects while excluding bad ones. Costly information precludes this: (a) for intermediate costs, good projects again always succeed in the limit, but bad projects also get funded with a probability that increases linearly in information's cost and decreases in its precision; (b) above a cut-off cost, no information is acquired and crowdfunding adds nothing to standard investment contracts.