Affiliation:
1. Cornell University, Ithaca, New York 14853;
2. The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104
Abstract
Lacking credible rule-enforcement mechanisms to punish misconduct, existing reward-based crowdfunding platforms can leave backers exposed to two risks: entrepreneurs may run away with backers’ money (funds misappropriation), and product specifications may be misrepresented (performance opacity). We show that each of these risks can materially impact crowdfunding efficiency, and, when jointly present, they interact with each other in ways that can dampen or, more worryingly, amplify their individual adverse effects. To mitigate these risks, we propose two mechanisms based on deferred payments. The first involves stopping the campaign once the funding goal is reached and servicing any unmet demand in the aftermarket. The second involves escrowing any funds raised in excess of the goal, as insurance for backers. We show that early stopping dominates escrow and boosts platform revenues. Pairing these deferred payment designs with (costly) performance verification contingencies can bring additional gains, but doing so can flip their relative performance, with escrow coming out on top. Overall, by accounting for different timing (pre- versus post-campaign) and enforcement rules (mandatory versus optional) of the verification contingencies, we analyze a total of 10 different designs and show that two of them dominate: the early stopping design and the escrow design with mandatory ex-post verification. We conclude by providing recommendations for which design works best under different conditions and exploring the potential of crowdsourced performance checks. This paper was accepted by Terry Taylor, operations management.
Publisher
Institute for Operations Research and the Management Sciences (INFORMS)
Subject
Management Science and Operations Research,Strategy and Management
Cited by
55 articles.
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