Asymmetric Information and Entrepreneurial Disincentives in Crowdfunding Markets

Reward-based crowdfunding has enabled entrepreneurs to interact with consumers even before the product launch. However, this market persistently suffers from a high failure rate—entrepreneurs fail to launch and deliver their products as promised. We model the product launch-decision of an entrepreneur who raises funds through reward-based crowdfunding and subsequently decides whether to continue with the product launch. Specifically, we investigate the extent to which crowdfunding sales influence product-launch decisions of different types of entrepreneurs. To do so, we collect structured and unstructured data from Kickstarter's digital-game category and classify attributes using supervised learning methods. We develop and estimate an integrated model of crowdfunding demand and entrepreneurs' product-launch decisions. We find that information revealed from crowdfunding sales has sizable impacts on the product-launch decisions of entrepreneurs with low-managerial-capital or who are new to the crowdfunding platform. Our counterfactual simulations suggest that platform policy designed to regulate overfunded projects can increase those entrepreneurs' willingness-to-launch to the same level as when they receive promising signals from crowdfunding demand