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Some Simple Economics of Crowdfunding

  • Ajay K. 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19133.

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Date of creation: Jun 2013
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Publication status: published as Some Simple Economics of Crowdfunding , Ajay Agrawal, Christian Catalini, Avi Goldfarb. in Innovation Policy and the Economy, Volume 14 , Lerner and Stern. 2014
Handle: RePEc:nbr:nberwo:19133
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