Discussion Paper Details

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Title: Cutting out the Middleman: Crowdinvesting, Efficiency, and Inequality

Author(s): Hans Peter Grüner and Christoph Siemroth

Publication Date: March 2015

Keyword(s): capital markets, crowdfunding, crowdinvesting, financial intermediation, financial markets, information aggregation, wealth inequality and welfare

Programme Area(s): Financial Economics

Abstract: We show that direct investments by consumers without the use of financial intermediaries can efficiently allocate financial capital to firms seeking funding for production of a novel consumption good. In our setting, consumers are also investors, and their privately known consumption preferences are correlated. Hence, consumers can use their own preferences to identify worthwhile investment opportunities and tend to invest in firms whose product they like. A socially optimal capital allocation and complete information aggregation about consumer preferences is achieved if and only if all groups of consumers have enough wealth to invest. If some groups of consumers cannot invest, then capital flows reflect preferences of the wealthy but not necessarily future aggregate demand. Traditional financial intermediaries can improve the allocation of capital only if wealth inequality prevents an efficient allocation of capital by consumers, but financing via intermediaries never reaches the social optimum.

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Bibliographic Reference

Grüner, H and Siemroth, C. 2015. 'Cutting out the Middleman: Crowdinvesting, Efficiency, and Inequality'. London, Centre for Economic Policy Research.