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Some Simple Economics of Crowdfunding

on Mon, 06/17/2013 - 21:01
Research by Creative Destruction Lab's Academic Director and Founder Ajay Agrawal, Christian Catalini (MIT Sloan and Creative Destruction Lab) and Avi Goldfarb (Rotman School of Management) published today by the National Bureau of Economic Research (http://www.nber.org/papers/w19133).
 

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Executive Summary
 
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.

Comments

Teemu Yamada's picture

This paper was a very insightful read, however I would like to add that the requirement of these "face-to-face interactions" is being broken with modern crowdfunding platforms that engage and most importantly challenge companies socially. The kind of active atmosphere behind every step of the crowdfunding process can create a level of trust and interest more quicker than through conventional crowdfunding methods. Of course the concept itself is nothing new, with traditional companies having used similar techniques, such as Arabia in Finland. But I feel it's time to speed up the process and promote investment on a much larger scale. With the huge power of crowdfunding, this could ultimately have a huge impact on the world economy.

Much regards,
Mr. Yamada
.

Thank you.

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