On founders and dictators: Does it pay to pay for signals in crowdfunding?

Abstract

Crowdfunding has become a serious means of financing new ventures. Funders come across numerous, often similar, projects seeking funds, making it difficult for them to decide which project to support. Founders can invest in signals (e.g., filing a patent) to highlight their projects, as signals are a typical communication channel on crowdfunding platforms. We examine how the cost of signaling affects funders' contributions. We modeled a crowdfunding situation using a modified dictator game in the laboratory. Our results illustrate that the higher the founders’ cost of signaling, the more the funders contribute, though not without restrictions; the characteristics of funders matter as reciprocity moderates this effect. Thus, our findings offer new insights for user innovators, entrepreneurs, and institutions, and explain why seemingly identical signals work differently.