Working Paper: NBER ID: w30820
Authors: Lin William Cong; Yizhou Xiao
Abstract: Economic interactions, such as crowdfunding, often involve sequential actions, observational learning, and contingent project implementation. We incorporate all-or-nothing thresholds in a canonical model of information cascades. Early supporters effectively delegate their decisions to a "gatekeeper," resulting in uni-directional cascades without herding on rejections. Project proposers consequently can charge higher prices. Proposal feasibility, project selection, and information aggregation all improve, even when agents can wait. Equilibrium outcomes depend on the crowd size, and project implementation and information aggregation achieve efficiency in the large-crowd limit. Our key insights remain robust under thresholds in dollar amounts, alternative equilibrium selection, among other model extensions.
Keywords: Crowdfunding; Information Cascades; Threshold Implementation
JEL Codes: D81; D83; G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| AON thresholds (C24) | unidirectional cascades (Y80) |
| positive signals (C29) | support (Y20) |
| negative signals (D91) | reluctance unless threshold is reached (D81) |
| AON thresholds (C24) | project feasibility and implementation efficiency (O22) |
| crowd size (D79) | errors associated with project support or rejection decrease (C52) |
| crowd size (D79) | socially efficient project implementation (H43) |
| AON thresholds (C24) | better information aggregation (D83) |
| AON thresholds (C24) | prevent down cascades and delay up cascades (C69) |