Contingent stimulus in crowdfunding

Abstract

Reward‐based crowdfunding is a form of innovative financing that allows project creators to raise funds from potential backers to start their ventures. A crowdfunding project is successfully funded if and only if the predetermined funding goal is achieved within a given time. We study the optimal timing of contingently placing a “fulcrum” in the random pledging process, with the potential of tilting it toward success, which would be a win‐win for the creator, backers, and platform. Specifically, we consider a model where backers arrive sequentially at a crowdfunding project. Upon arrival, a backer makes her pledging decision by taking into account the expected success of the project. We characterize the dynamics of the project's pledging process. We show that there exists a cascade effect on backers' pledging, which is mainly driven by the all‐or‐nothing nature of crowdfunding projects. According to our data collected from the most popular online crowdfunding platform, Kickstarter, the majority of projects fail to achieve their goals. To address this issue, we propose three contingent stimulus policies, namely, seeding, feature upgrade, and limited‐time offer. As a result of the cascade effect on backers' pledging, the optimal timing to apply stimulus policies has a cutoff‐time structure. Lastly, we show that the benefit of contingent policies is greatest in the middle of crowdfunding campaigns. Testing with the dataset of Kickstarter, we obtain empirical evidence that the projects' success rates improve by 14.6% on average with updates in the middle of the campaign and when the pledging progress is lagging.