Optimal Investment-Based Crowdfunding: Crowdblessing Versus Scale

This paper examines crowdfunding of a risky project with constant returns to scale. The crowdfunder's chosen threshold and interest rate jointly determine profit and welfare via information aggregation and investors' information acquisition and bidding decisions. At fixed investor strategies, a higher threshold funds fewer projects but raises the ratio of good to bad quality among those funded – a "crowdblessing" or positive selection lacking in standard finance. This also reduces incentives to acquire and use private information, as do interest rate increases. Optimal design trades off the scale of investment against the level of crowdblessing. Surprisingly, profit-maximizers induce excessive information acquisition to limit investor rent. Comparative statics show that information acquisition falls with its cost, rises with its precision and falls with prior optimism. Costs reduce welfare but may raise profits by facilitating rent-extraction.