Asymmetric Information and Crowdfunding

Abstract

This paper offers a model of crowdfunding that represents a growing area of interest among practitioners and theorists. The model is based on asymmetric information between founders and funders regarding projects' quality. It provides several implications that have not yet been tested. For example we find that high-quality projects prefer reward-based crowdfunding. The choice of an all-or-nothing (AON) mechanism as opposed to a keep-it-all can serve as a signal of a firm's quality as well. Finally we find that high-quality firms use the size of the AON campaign as a signal. In particular, it should not be too big or too small.