Market Imperfections and Crowdfunding

This paper offers a model of crowdfunding that represents a growing area of interest among practitioners and theorists. It is one of the first articles analyzing the choice between different types of crowdfunding (reward-based vs. equity-based) and the choice between crowdfunding and traditional financing. The model is based on most important features of crowdfunding: the market feedback regarding firm's project, potential moral hazard issues and asymmetric information between entrepreneur and funders and customers. The model provides several implications most of which have not been yet been tested. In most cases large projects prefer equity-based crowdfunding. When asymmetric information is important, high-quality projects prefer reward-based crowdfunding. The choice of all-or-nothing mechanisme in opposite to keep-it-all can serve as a signal of firm's quality. Finally, crowdfunding is selected over traditional bank loan if either the amount of investments is very small (it will be reward-based crowdfunding) or if benefits from market feedback are sufficiently large (it will be equity-based crowdfunding)