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Information Cascades and Threshold Implementation: Theory and An Application to Crowdfunding

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  • Lin William Cong
  • Yizhou Xiao

Abstract

Economic interactions, such as crowdfunding, often involve sequential actions, observational learning, and contingent project implementation. We incorporate all-or-nothing thresholds in a canonical model of information cascades. Early supporters effectively delegate their decisions to a "gatekeeper," resulting in uni-directional cascades without herding on rejections. Project proposers consequently can charge higher prices. Proposal feasibility, project selection, and information aggregation all improve, even when agents can wait. Equilibrium outcomes depend on the crowd size, and project implementation and information aggregation achieve efficiency in the large-crowd limit. Our key insights remain robust under thresholds in dollar amounts, alternative equilibrium selection, among other model extensions.

Suggested Citation

  • Lin William Cong & Yizhou Xiao, 2023. "Information Cascades and Threshold Implementation: Theory and An Application to Crowdfunding," NBER Working Papers 30820, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:30820
    Note: AP CF PR
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    Cited by:

    1. Andrej Woerner & Sander Onderstal & Arthur Schram, 2022. "Comparing Crowdfunding Mechanisms: Introducing the Generalized Moulin-Shenker Mechanism," CESifo Working Paper Series 10081, CESifo.

    More about this item

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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