Abstract
When a group of investors with dispersed private information jointly invest in a risky project, how should they divide the project payoff? The typical approach with common stocks rewards investors in proportion to their initial investment, but is it really optimal? Answers to these questions have implications for many business activities in our information age, including the efficacy of the emerging practice of security-based crowdfunding in harnessing the wisdom of the crowd. This paper shows that simple profit-sharing contracts with decentralized decision making could first best coordinate individuals' investment choices, and hence optimally utilize the group's collective wisdom. This result connects the traditional diversification insight underpinning portfolio theory to investment under private information.
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