Tapping the Financial Wisdom of the Crowd - Crowdfunding as a Tool to Aggregate Vague Information

Konferenzbeitrag

Crowdfunding, a novel form of financing, has seen massive growth over the last few years. Under crowdfunding, a large number of small households offers small loans to a firm. But if some threshold is missed, the firm cannot draw the loans. We construct a model to argue that this mechanism can be used to aggregate vague information by many households (for example, potential future consumers of the firms product). Each household can spend an effort to produce a bit of vague information too vague to justify a straight loan. But if the firm sets the threshold high, a household knows that his money will be drawn only if many other households also get positive information. We describe the equilibrium behavior of households and firms. A welfare analysis reveals that with crowdfunding, firms set the loan rate too low and the threshold too low, inducing households to generate too much information. In comparison to straight finance, crowdfunding is employed too often.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Beiträge zur Jahrestagung des Vereins für Socialpolitik 2014: Evidenzbasierte Wirtschaftspolitik - Session: Financial Markets and Information ; No. G09-V1

Classification and Topics

• Classification: Wirtschaft ; Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors ; Information and Product Quality; Standardization and Compatibility ; Financial Institutions and Services: General

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Schlegel, Friederike ; Hakenes, Hendrik
• Event: Veröffentlichung
• (who): ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften, Leibniz-Informationszentrum Wirtschaft
• (where): Kiel und Hamburg
• (when): 2014

Further information

• Handle: http://hdl.handle.net/10419/100563
• Last update: 10.03.2025, 11:44 AM CET