Crowdfunding, asymmetric information and pecking order
Year: 2024
Type: article
Abstract: Crowdfunding is a rapidly growing phenomenon in theory and practice. A significant gap exists between theoretical literature and empirical evidence regarding the volumes of crowdfunding and the quality of firms that use crowdfunding. This is one of the first articles that o¤ers a theory of entrepreneurs'choice between debt, equity and crowdfunding (reward-based) where information about the expected quality of products developed by entrepreneurs is asymmetric. We argue that in most cases crowdfunding is at the end of pecking order. The payments in the form of pre-orders come before the project investment is made making the entrepreneur's profit independent of actual quality of the product creating a strong ground for cross-subsidies of low-quality entrepreneurs by highquality entrepreneurs in a pooling equilibrium. The paper is consistent with some well known empirical phenomena on crowdfunding eg. relatively small volumes of crowdfunding vs. traditional funding, low volumes of reward-based crowdfunding vs. debt-based and equity-based crowdfunding and excess entry of low-quality firms to crowdfunding market. We further compare this approach with an approach based on asymmetric information about the cost of production/investment (as in Belleflamme et al (2014) and some other papers) and argue that even though some predictions maybe close under some general assumptions both approaches lead to qualitatively di¤erent results.
Source: Journal of Economic Studies
Author: Anton Miglo
Institutions: University of Toronto, University of Glasgow
Language: English
Subfield: Management Information Systems
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W4404536263