DP11363 Learning through Crowdfunding

Author(s): Gilles Chemla, Katrin Tinn
Publication Date: June 2016
Date Revised: December 2017
Keyword(s): Kickstarter, learning, moral hazard, real options, Reward-based crowdfunding, uncertainty
JEL(s): D80, G30, L14, L26, O30
Programme Areas: Financial Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11363

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.