Reward‐Based Crowdfunding: The Role of Information Disclosure

Abstract

ABSTRACTThis article studies the role and value of information disclosure in a reward‐based crowdfunding campaign for a new product development (NPD) project under quality uncertainty. The creator sets a funding target that is subject to a minimum capital requirement and prices for a leading backer and a following backer arriving in two sequential periods. The backers form a prior belief about the quality of the product and update their valuation according to their private signals before they decide whether to bid for the products. The leading backer's bid, if disclosed, may be used by the subsequent backer to infer the former's private signal. We identify two interacting effects that drive the bidding decisions and the profitability of the campaign: an observational learning effect driven by information disclosure and a targeting effect. When the target is relatively high, information disclosure can always benefit the creator. When the target is relatively low, information disclosure may hurt the creator. The optimal target level is always equal to the minimum capital requirement. We further extend the analysis to a setting with a forward‐looking leading backer who may strategically wait and identify the conditions under which information disclosure can also increase the profitability of the campaign. Interestingly, to counteract the strategic delay, the optimal target can be set higher than the minimum capital requirement in the presence of information disclosure.