Crowdfunding: an alternative financing option for entrepreneurs and creators?

• Applicant: Tobias Regner, Ph.D.
• Subject Area: Economic Policy, Applied Economics ; Accounting and Finance
• Term: from 2016 to 2021
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 315781995

This project studies the entrepreneurial finance market. It particularly focuses on crowdfunding, an alternative to traditional financiers like banks or venture capital, that emerged recently. Crowdfunding grew exponentially in the last years and has the potential to do better than the incumbent funders of entrepreneurs/creators. The relationship between entrepreneurs looking for funding and external financiers is marred by information asymmetries regarding the entrepreneurial project's quality. This results in efficiency losses as worthy projects go unfunded, because financial intermediaries are unable to evaluate them effectively. In contrast to traditional financiers, crowdfunding allows individuals to make a direct funding decision. Specifically, the crowd (the mass of individuals) provides financial resources to the entrepreneur in return for equity stakes, interest payment, the future product/service, or a non-monetary reward. The intriguing features of crowdfunding are that it introduces new actors (crowdfunders) to the supply side of entrepreneurial finance and that entrepreneur and crowdfunders interact directly in (partly) innovative ways. The matching of entrepreneurs and crowdfunders is often facilitated by online platforms. Crowdfunding's exponential growth over the last few years exemplifies its appeal and potential. Based on a sound understanding of crowdfunding's characteristics in comparison to other intermediaries in entrepreneurial finance, the goal of the proposed project is to gain insights, why crowdfunding works, when it works best/worst, and what can be done to make it work even better. More specifically, the project aims to answer the following questions. What makes individuals contribute to a crowdfunded project? Could crowdfunding be more effective than its alternatives? Which design features can improve crowdfunding? For this purpose, the proposed research project consists of distinct but inter-related methodological parts that complement each other. While the empirical analysis of field data from crowdfunding platforms facilitates the identification of general patterns of behaviour, it is limited to a descriptive and correlational analysis. In contrast, the controlled setting in the laboratory allows to test for causal relationships and to focus on specific aspects of interest that could not be pursued with field data. This is supported by a sound theoretical understanding of crowdfunding's role in entrepreneurial finance. Existing theoretical work models the relationship between entrepreneurial finance actors in a principal-agent framework in order to take adverse selection and moral hazard, known issues in entrepreneurial finance, into account. The proposed project adopts this approach as a theoretical framework that guides the experimental analysis. Moreover, a behavioural game-theory approach is used so that social and community factors, features of crowdfunding, can be taken into account.

• DFG Programme: Research Grants