Crowdfunding creative ideas: the dynamics of project backers in kickstarter
TL;DR: This article studied the role of social information in the dynamic behavior of project backers and found that additional backer support is negatively related to its past backer support, while the diffusion of responsibility effects diminish as the project funding cycle approaches its closing date.
Abstract: Entrepreneurs are turning to crowdfunding as a way to finance their creative ideas. Crowdfunding involves relatively small contributions of many consumer-investors over a fixed time limit (generally a few weeks). In online crowdfunding communities, potential donors can see the level of support from other project backers as well as its timing before making their own funding decisions, suggesting that social information (i.e., others’ funding decisions) will play an important role in the ultimate success of a project. Two years of publicly available panel data on successfully and unsuccessfully funded projects listed on Kickstarter is used to empirically study the role of social information in the dynamic behavior of project backers. Building off the well-established social psychology theory around diffusion of responsibility effects, we show that additional backer support is negatively related to its past backer support. Many potential backers do not contribute to a project that has already received a lot of support because they assume that others will provide the necessary funding. Consistent with the deadline effect widely observed in bargaining and online auctions, we also show that the diffusion of responsibility effects diminish as the project funding cycle approaches its closing date. Moreover, as the project deadline draws near we find that project updates tend to increase as the project creators make a final plea for help to reach their funding goal. Reduced diffusion of responsibility effects, together with the positive influence of project updates, lead to generally increasing project support in the final stages of funding. This is particularly the case for projects that successfully achieve their goals as they are more likely to have an update in the last weeks of funding and generate more excitement from recent backers than projects that fall short.
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TL;DR: This article found that personal networks and underlying project quality are associated with the success of crowdfunding efforts, and that geography is related to both the type of projects proposed and successful fundraising, while the vast majority of founders seem to fulfill their obligations to funders, but that over 75% deliver products later than expected, with the degree of delay predicted by the level and amount of funding a project receives.
Abstract: Crowdfunding allows founders of for-profit, artistic, and cultural ventures to fund their efforts by drawing on relatively small contributions from a relatively large number of individuals using the internet, without standard financial intermediaries. Drawing on a dataset of over 48,500 projects with combined funding over $237M, this paper offers a description of the underlying dynamics of success and failure among crowdfunded ventures. It suggests that personal networks and underlying project quality are associated with the success of crowdfunding efforts, and that geography is related to both the type of projects proposed and successful fundraising. Finally, I find that the vast majority of founders seem to fulfill their obligations to funders, but that over 75% deliver products later than expected, with the degree of delay predicted by the level and amount of funding a project receives. These results offer insight into the emerging phenomenon of crowdfunding, and also shed light more generally on the ways that the actions of founders may affect their ability to receive entrepreneurial financing.
2,621 citations
Cites background from "Crowdfunding creative ideas: the dy..."
...…even this expansive definition potentially leaves out examples that scholars in various fields have labeled “crowdfunding,” including internet-based peer-to-peer lending (Lin and Viswanathan, 2013) and fundraising drives initiated by fans of a music group (Burkett, 2011), among many other cases....
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TL;DR: This article found that personal networks and underlying project quality are associated with the success of crowdfunding efforts, and that geography is related to both the type of projects proposed and successful fundraising, while the vast majority of founders seem to fulfill their obligations to funders, but that over 75% deliver products later than expected, with the degree of delay predicted by the level and amount of funding a project receives.
1,822 citations
TL;DR: In this article, the authors compare two forms of crowdfunding: entrepreneurs solicit individuals either to pre-order the product or to advance a fixed amount of money in exchange for a share of future profits (or equity).
1,573 citations
TL;DR: In this paper, the authors compare two forms of crowdfunding: entrepreneurs solicit individuals either to pre-order the product or to advance a fixed amount of money in exchange for a share of future profits (or equity).
Abstract: With crowdfunding, an entrepreneur raises external financing from a large audience (the "crowd"), in which each individual provides a very small amount, instead of soliciting a small group of sophisticated investors. This article compares two forms of crowdfunding: entrepreneurs solicit individuals either to pre-order the product or to advance a fixed amount of money in exchange for a share of future profits (or equity). In either case, we assume that "crowdfunders" enjoy "community benefits" that increase their utility. Using a unified model, we show that the entrepreneur prefers pre-ordering if the initial capital requirement is relatively small compared with market size and prefers profit sharing otherwise. Our conclusions have implications for managerial decisions in the early development stage of firms, when the entrepreneur needs to build a community of individuals with whom he or she must interact. We also offer extensions on the impact of quality uncertainty and information asymmetry.
1,400 citations
Additional excerpts
...Such investment can take the form of equity purchase, loan, donation, or pre-ordering of the product (see Agrawal et al., 2011, 2013; Ahlers et al., 2012; Kuppuswamy and Bayus, 2013; Mollick, 2014)....
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TL;DR: In this paper, the authors provide a preliminary exploration of the underlying economics of nonequity crowdfunding and highlight the extent to which economic theory, in particular transaction costs, reputation, and market design, can explain the rise of crowdfunding and offer a framework for speculating on how eq...
Abstract: Executive SummaryIt 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 United States, 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 nonequity crowdfunding and offer a framework for speculating on how eq...
863 citations
Cites background from "Crowdfunding creative ideas: the dy..."
...At the same time, projects that are eventually successful might slow down in the middle of the process because of a bystander effect - a reduction in the propensity to fund by new individuals because of the perception that the target will be reached regardless (Kuppuswamy and Bayus, 2013)....
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...to fund by new individuals because of the perception that the target will be reached regardless (Kuppuswamy and Bayus, 2013)....
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References
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Book•
01 Jan 2001
TL;DR: This is the essential companion to Jeffrey Wooldridge's widely-used graduate text Econometric Analysis of Cross Section and Panel Data (MIT Press, 2001).
Abstract: The second edition of this acclaimed graduate text provides a unified treatment of two methods used in contemporary econometric research, cross section and data panel methods. By focusing on assumptions that can be given behavioral content, the book maintains an appropriate level of rigor while emphasizing intuitive thinking. The analysis covers both linear and nonlinear models, including models with dynamics and/or individual heterogeneity. In addition to general estimation frameworks (particular methods of moments and maximum likelihood), specific linear and nonlinear methods are covered in detail, including probit and logit models and their multivariate, Tobit models, models for count data, censored and missing data schemes, causal (or treatment) effects, and duration analysis. Econometric Analysis of Cross Section and Panel Data was the first graduate econometrics text to focus on microeconomic data structures, allowing assumptions to be separated into population and sampling assumptions. This second edition has been substantially updated and revised. Improvements include a broader class of models for missing data problems; more detailed treatment of cluster problems, an important topic for empirical researchers; expanded discussion of "generalized instrumental variables" (GIV) estimation; new coverage (based on the author's own recent research) of inverse probability weighting; a more complete framework for estimating treatment effects with panel data, and a firmly established link between econometric approaches to nonlinear panel data and the "generalized estimating equation" literature popular in statistics and other fields. New attention is given to explaining when particular econometric methods can be applied; the goal is not only to tell readers what does work, but why certain "obvious" procedures do not. The numerous included exercises, both theoretical and computer-based, allow the reader to extend methods covered in the text and discover new insights.
28,298 citations
09 May 2005
TL;DR: This chapter discusses models for making pseudo-random draw, which combines asymptotic theory, Bayesian methods, and ML and NLS estimation with real-time data structures.
Abstract: This book provides the most comprehensive treatment to date of microeconometrics, the analysis of individual-level data on the economic behavior of individuals or firms using regression methods for cross section and panel data. The book is oriented to the practitioner. A basic understanding of the linear regression model with matrix algebra is assumed. The text can be used for a microeconometrics course, typically a second-year economics PhD course; for data-oriented applied microeconometrics field courses; and as a reference work for graduate students and applied researchers who wish to fill in gaps in their toolkit. Distinguishing features of the book include emphasis on nonlinear models and robust inference, simulation-based estimation, and problems of complex survey data. The book makes frequent use of numerical examples based on generated data to illustrate the key models and methods. More substantially, it systematically integrates into the text empirical illustrations based on seven large and exceptionally rich data sets.
8,189 citations
TL;DR: Propensity score matching (PSM) has become a popular approach to estimate causal treatment effects as discussed by the authors, but empirical examples can be found in very diverse fields of study, and each implementation step involves a lot of decisions and different approaches can be thought of.
Abstract: Propensity score matching (PSM) has become a popular approach to estimate causal treatment effects. It is widely applied when evaluating labour market policies, but empirical examples can be found in very diverse fields of study. Once the researcher has decided to use PSM, he is confronted with a lot of questions regarding its implementation. To begin with, a first decision has to be made concerning the estimation of the propensity score. Following that one has to decide which matching algorithm to choose and determine the region of common support. Subsequently, the matching quality has to be assessed and treatment effects and their standard errors have to be estimated. Furthermore, questions like 'what to do if there is choice-based sampling?' or 'when to measure effects?' can be important in empirical studies. Finally, one might also want to test the sensitivity of estimated treatment effects with respect to unobserved heterogeneity or failure of the common support condition. Each implementation step involves a lot of decisions and different approaches can be thought of. The aim of this paper is to discuss these implementation issues and give some guidance to researchers who want to use PSM for evaluation purposes.
5,510 citations
TL;DR: In this article, the authors present the correct way to estimate the magnitude and standard errors of the interaction effect in nonlinear models, which is the same way as in this paper.
5,500 citations
Posted Content•
TL;DR: It is argued that localized conformity of behavior and the fragility of mass behaviors can be explained by informational cascades.
Abstract: An informational cascade occurs when it is optimal for an individual, having observed the actions of those ahead of him, to follow the behavior of the preceding individual without regard to his own information. We argue that localized conformity of behavior and the fragility of mass behaviors can be explained by informational cascades.
5,412 citations
Additional excerpts
...March 16, 2013...
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