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Crowdfunding, demand uncertainty, and moral hazard: A mechanism design approach

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  • Strausz, Roland

Abstract

Crowdfunding challenges the traditional separation between finance and marketing. It creates economic value by reducing demand uncertainty, which enables a better screening of positive NPV projects. Entrepreneurial moral hazard threatens this effect. Using mechanism design, mechanisms are characterized that induce efficient screening, while preventing moral hazard. "All-or-nothing" reward-crowdfunding platforms reflect salient features of these mechanisms. Efficiency is sustainable only if expected gross returns exceed twice expected investment costs. Constrained efficient mechanisms exhibit underinvestment. With limited consumer reach, crowdfunders become actual investors. Crowdfunding complements rather than substitutes traditional entrepreneurial financing, because each financing mode displays a different strength.

Suggested Citation

  • Strausz, Roland, 2015. "Crowdfunding, demand uncertainty, and moral hazard: A mechanism design approach," SFB 649 Discussion Papers 2015-036, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    • Handle: RePEc:zbw:sfb649:sfb649dp2015-036
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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing

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