An entrepreneur finances her project via crowdfunding. She chooses a funding mechanism (fixed or flexible), a price, and a funding goal. Under fixed funding, money is refunded if the goal is not met; under flexible funding, there is no refund. Backers observe signals about project value and decide whether to contribute or postpone purchase to the retail stage. Using the linkage principle, we show that the optimal campaign uses fixed funding. Furthermore, we show that an entrepreneur who is not financially constrained can approximately extract full surplus using fixed funding. Therefore, crowdfunding is attractive to both small and large entrepreneurs.
"The Economics of Crowdfunding."
American Economic Journal: Microeconomics,
Asymmetric and Private Information; Mechanism Design
Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill