Experts vs. Non-Experts in Online Markets : Evidence from a Natural Experiment in Debt Crowdfunding

The dynamics between coexisting experts and non-experts has important implications for online market and platform design. We study their relationship in the context of crowdfunding. While crowdfunding originated as a non-expert market, experts have become active participants. We investigate the costs and benefits associated with experts competing with non-experts during a unique period in one crowdfunding market when every investor was given the same unambiguous signal of relative valuation. Contrary to previous evidence, we find that experts are substantially better than non-experts at using common information to evaluate project success. Moreover, because experts overinvest in the best projects, experts outperform non-experts who invest more heavily in worse projects. Thus, expert participation in crowdfunding markets has both positive and negative implications for these platforms. On the positive side, experts increase the efficiency of these markets, which can drive both borrowers and lenders to the market. On the negative side, the higher returns garnered by experts are at the expense of non-expert investors. Surprisingly, however, the latter effects are quite small. Our findings provide an important contribution to understanding the relationship between experts and non-experts in online markets