Working Paper: NBER ID: w19133
Authors: Ajay K. Agrawal; Christian Catalini; Avi Goldfarb
Abstract: It is not surprising that the financing of early-stage creative projects and ventures is typically geographically localized since these types of funding decisions are usually predicated on personal relationships and due diligence requiring face-to-face interactions in response to high levels of risk, uncertainty, and information asymmetry. So, to economists, the recent rise of crowdfunding - raising capital from many people through an online platform - which offers little opportunity for careful due diligence and involves not only friends and family but also many strangers from near and far, is initially startling. On the eve of launching equity-based crowdfunding, a new market for early-stage finance in the U.S., we provide a preliminary exploration of its underlying economics. We highlight the extent to which economic theory, in particular transaction costs, reputation, and market design, can explain the rise of non-equity crowdfunding and offer a framework for speculating on how equity-based crowdfunding may unfold. We conclude by articulating open questions related to how crowdfunding may affect social welfare and the rate and direction of innovation.
Keywords: Crowdfunding; Early-stage finance; Social welfare; Innovation
JEL Codes: D47; D82; G21; G24; L26; L86; R12; Z11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Crowdfunding (O36) | Total capital allocated to innovation (O36) |
| Crowdfunding (O36) | Job creation (J23) |
| Crowdfunding (O36) | Funding for undercapitalized ideas (O36) |
| Crowdfunding (O36) | Lower cost of capital access (G32) |
| Crowdfunding (O36) | Herding behavior among funders (C92) |
| Information asymmetries (D82) | Market failures (D52) |
| Crowdfunding (O36) | Risks (fraud and investor incompetence) (G24) |