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Tapping the Financial Wisdom of the Crowd - Crowdfunding as a Tool to Aggregate Vague Information

Author

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  • Schlegel, Friederike
  • Hakenes, Hendrik

Abstract

Crowdfunding, a novel form of financing, has seen massive growth over the last few years. Under crowdfunding, a large number of small households offers small loans to a firm. But if some threshold is missed, the firm cannot draw the loans. We construct a model to argue that this mechanism can be used to aggregate vague information by many households (for example, potential future consumers of the firms product). Each household can spend an effort to produce a bit of vague information too vague to justify a straight loan. But if the firm sets the threshold high, a household knows that his money will be drawn only if many other households also get positive information. We describe the equilibrium behavior of households and firms. A welfare analysis reveals that with crowdfunding, firms set the loan rate too low and the threshold too low, inducing households to generate too much information. In comparison to straight finance, crowdfunding is employed too often.

Suggested Citation

  • Schlegel, Friederike & Hakenes, Hendrik, 2014. "Tapping the Financial Wisdom of the Crowd - Crowdfunding as a Tool to Aggregate Vague Information," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100563, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc14:100563
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    References listed on IDEAS

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    5. Chamley,Christophe P., 2004. "Rational Herds," Cambridge Books, Cambridge University Press, number 9780521824019, January.
    6. Rubinton, Brian J, 2011. "Crowdfunding: disintermediated investment banking," MPRA Paper 31649, University Library of Munich, Germany.
    7. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 1998. "Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 151-170, Summer.
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    Cited by:

    1. Ellman, Matthew & Hurkens, Sjaak, 2019. "Optimal crowdfunding design," Journal of Economic Theory, Elsevier, vol. 184(C).
    2. Santautė Venslavienė & Jelena Stankevičienė & Agnė Vaiciukevičiūtė, 2021. "Assessment of Successful Drivers of Crowdfunding Projects Based on Visual Analogue Scale Matrix for Criteria Weighting Method," Mathematics, MDPI, vol. 9(14), pages 1-18, July.
    3. Cason, Timothy N. & Zubrickas, Robertas, 2019. "Donation-based crowdfunding with refund bonuses," European Economic Review, Elsevier, vol. 119(C), pages 452-471.
    4. Constantin von Selasinsky & Eva Lutz, 2021. "The Effects of Pro-Social and Pro-Environmental Orientation on Crowdfunding Performance," Sustainability, MDPI, vol. 13(11), pages 1-27, May.
    5. Praveen Kumar & Nisan Langberg & David Zvilichovsky, 2020. "Crowdfunding, Financing Constraints, and Real Effects," Management Science, INFORMS, vol. 66(8), pages 3561-3580, August.
    6. Chu, Tiankuo & Wei, Xu & Zhou, Yimin, 2021. "The pricing and efficiency of pre-Sale crowdfunding," Finance Research Letters, Elsevier, vol. 40(C).

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    More about this item

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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