Working Paper: NBER ID: w16820
Authors: Ajay K. Agrawal; Christian Catalini; Avi Goldfarb
Abstract: Perhaps the most striking feature of "crowdfunding" is the broad geographic dispersion of investors in small, early-stage projects. This contrasts with existing theories that predict entrepreneurs and investors will be co-located due to distance-sensitive costs. We examine a crowdfunding setting that connects artist-entrepreneurs with investors over the internet for financing musical projects. The average distance between artists and investors is about 3,000 miles, suggesting a reduced role for spatial proximity. Still, distance does play a role. Within a single round of financing, local investors invest relatively early, and they appear less responsive to decisions by other investors. We show this geography effect is driven by investors who likely have a personal connection with the artist-entrepreneur ("family and friends"). Although the online platform seems to eliminate most distance-related economic frictions such as monitoring progress, providing input, and gathering information, it does not eliminate social-related frictions.
Keywords: Crowdfunding; Geographic Dispersion; Investment Patterns; Social Networks; Early-stage Financing
JEL Codes: G21; G24; L17; R12; Z11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Geographic distance (R12) | investment responsiveness (G31) |
| Family and friends (FF) (J12) | investment dynamics (G31) |
| Local investors (G19) | early investment (G31) |
| Distant investors (F21) | investment propensity increases as capital accumulates (E22) |
| Controlling for FF (C29) | distance effect on propensity to invest disappears (F21) |
| Online platforms (D26) | mitigate distance-related economic frictions (R12) |
| Local social networks (Z13) | crucial role in early-stage investments (G24) |