On the fixed and flexible funding mechanisms in reward-based crowdfunding

Abstract

This study examines two types of crowdfunding mechanisms, namely, the fixed and the flexible funding mechanisms. Under the fixed funding mechanism, the pledges are returned to the backers if the crowdfunding project fails (All-or-Nothing), while under the flexible funding mechanism, the creators could keep all the raised pledges irrespective of whether the project succeeds or not (Keep-it-All). We show that the fixed and the flexible funding mechanisms have their own advantages under certain circumstances. Specifically, according to the basic model built for these two funding mechanisms, under each mechanism, we investigate the pledging strategies of the backers as well as the expected profit of the creator (e.g., the creator prefers flexible funding when the unit pledging cost is relatively low). Subsequently, we generalize our models by considering the product qualities. In addition to the main results consistent with those derived in the basic model, we also find some new interesting results, for example, the creator will always provide the backers with higher-quality products under the flexible funding mechanism when the product quality level is endogenous. Finally, we provide several interesting extensions of our studies on the fixed and the flexible funding mechanisms, including the following cases wherein: (i) the warm-glow takes effect, (ii) the number and the types of backers varies, (iii) the platform reacts to the flexible funding mechanism, and (iv) the backer’s valuation follows normal distribution. These investigations can effectively guide the decision makers during the crowdfunding activities.