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Signaling Quality: How Refund Bonsues Can Overcome Information Asymmetries in Crowdfunding

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  • Timothy N. Cason
  • Alex Tabarrok
  • Robertas Zubrickas

Abstract

Crowdfunding can suffer from information asymmetry, leaving some investors disappointed with low-quality projects while other high-quality projects remain unfunded. We show that refund bonuses, which provide investors a payment if a fundraising campaign is unsuccessful, can signal project quality and help overcome the market failure in crowdfunding. Because strong projects have a lower risk of bonus payout, entrepreneurs with strong projects are more likely to offer bonuses. This signals high quality to investors, and due to their updated beliefs this drives investment toward such projects. An experiment provides supporting empirical evidence for the benefits of this signaling solution to the problems of information asymmetry in crowdfunding.

Suggested Citation

  • Timothy N. Cason & Alex Tabarrok & Robertas Zubrickas, 2024. "Signaling Quality: How Refund Bonsues Can Overcome Information Asymmetries in Crowdfunding," Purdue University Economics Working Papers 1339, Purdue University, Department of Economics.
    • Handle: RePEc:pur:prukra:1339
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    File URL: https://business.purdue.edu/research/working-papers-series/2024/1339.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Crowdfunding; threshold implementation; adverse selection; experiments;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • 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

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