Resolving information asymmetries in financing new product development: The case of reward-based crowdfunding

Abstract

Reward-based crowdfunding has evolved as a significant alternative source of financing for new product development over the past years. Unlike traditional investors, reward-based crowdfunding investors financing the production process are essentially consumers pre-ordering the product. Since financing takes place prior to production, this context is prone to information asymmetries. Consumers financing new product development have incomplete information regarding the quality of the product they have pre-ordered and the reward they will receive for their early support. We draw on information economics to examine how signals, such as price commitment, discount, and reward classes, play a role in conveying information about product quality and the financial reward backers receive for pre-ordering the product. Our empirical analysis covers detailed hand-collected information on a random sample of 1835 Kickstarter campaigns. We find that signaling information regarding the future retail price enhances campaign performance. Moreover, when the different signals originate from the same source and overlap in the information they convey, the more informative signals partially offset the effect of the less informative signals.