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Discussion Paper Details

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Title: Learning through Crowdfunding

Author(s): Gilles Chemla and Katrin Tinn

Publication Date: June 2016

Keyword(s): Kickstarter, learning, moral hazard, real options, Reward-based crowdfunding and uncertainty

Programme Area(s): Financial Economics and Industrial Organization

Abstract: We develop a model where reward-based crowdfunding enables firms to obtain a reliable proof of concept early in their production cycle. Crowdfunding allows firms to learn about total demand from a limited sample of target consumers pre-ordering a new product. Learning creates a valuable real option as firms invest only if updated in and out of sample demand is sufficiently high. This is particularly valuable for firms facing a high degree of uncertainty about consumer preferences, such as developers of innovative consumer products. The real option value of learning enables these firms to overcome moral hazard, even if diverting funds is costless. The higher the funds raised, the lower the firms' incentives to divert them, provided third-party platforms limit the sample size by restricting campaign length. Expected funds raised are maximized at an intermediate sample size. Our results are consistent with stylized facts and lead to new empirical implications.

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Bibliographic Reference

Chemla, G and Tinn, K. 2016. 'Learning through Crowdfunding'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=11363