Quality and Pricing Decisions for Reward-based Crowdfunding: Effects of Moral Hazard

Abstract

Private cost information and entrepreneurial moral hazard are serious problems that result from the significant information asymmetry associated with creators and their backers in reward-based crowdfunding. We establish a dynamic game-theoretic model to investigate the effect of moral hazard on the quality and price decisions of a creator (male) when his cost efficiency is unobservable. Backers (female) in the crowdfunding stage directly observe neither the cost efficiency nor the product quality of the creator. They then make pledge decisions based on expectations about the quality after observing the campaign parameter signals (i.e., the reward price and funding goal) and whether the regulation mechanism is implemented with a strong hand (tighter regulations mean that the creators have less moral hazard). We find that compared with the information symmetry case, when the efficiency of creators is not known to backers, an efficient creator always provides a higher level of product quality when moral hazard is present but not always when moral hazard is absent. In addition, we investigate the effect of moral hazard on the creator and consumer surplus when the creator's cost efficiency is unobservable. Interestingly, we show that moral hazard may benefit both the creator and consumers. This explains the puzzling measures of some reward crowdfunding platforms such as Kickstarter and Indiegogo, which take no active role in managing or monitoring the entrepreneurial projects. Finally, we find that reasonably the efficient creator can better signal his efficiency by using two signaling devices, i.e., the reward price and funding goal; in this case, interestingly, the existence of moral hazard may still benefit both the creators and consumers. This confirms the robustness of our main results.