Journal Article

Learning Through Crowdfunding

Chemla, Gilles, Tinn, Katrin

2020

Overview

We develop a model in which reward-based crowdfunding enables firms to obtain a reliable proof of concept early in their production cycle: they learn about total demand from a limited sample of target consumers preordering a new product. Learning from the crowdfunding sample creates a valuable real option because firms invest only if updated expectations about total demand are sufficiently high. This is particularly valuable for firms facing a high degree of uncertainty about consumer preferences, such as developers of innovative consumer products. Learning also enables firms to overcome moral hazard. The higher the funds raised, the lower the firms’ incentives to divert them, provided third-party platforms limit the sample size by restricting campaign length. Although the probability of campaign success decreases with sample size, the expected funds raised are maximized at an intermediate sample size. Our results are consistent with stylized facts and lead to new empirical implications. This paper was accepted by Gustavo Manso, finance.

• Publisher: INFORMS,Institute for Operations Research and the Management Sciences
• Subject: Business administration / Campaigns / Companies / Consumer behavior / Consumer goods / Consumer preferences / Consumers / Crowdfunding / Economic incentives / Ethical aspects / Humanities and Social Sciences / Incentives / Learning / Moral hazard / Political platform / Probability / real options / reward-based crowdfunding / Uncertainty