Fraud tolerance in optimal crowdfunding

Matthew Ellman, Sjaak Hurkens

    Research output: Contribution to journalArticleResearch

    2 Citations (Scopus)

    Abstract

    © 2019 Reward-based crowdfunding enables credit-constrained entrepreneurs to raise money to develop and create innovative products. Crowdfunders’ low monitoring incentives open the door to fraud. In practice, fraud is surprisingly rare. Strausz (2017) proves that crowdfunding implements the optimal ex post individually rational mechanism design outcome in an environment with entrepreneurial moral hazard and private cost information. However,ex post individual rationality precludes all crowdfunding unless fraud can be prevented with certainty. Actual crowdfunding tolerates some fraud. We show this (i) generates strictly higher profits and welfare, but (ii) cannot implement the optimal ex interim individually rational outcome.
    Original languageEnglish
    Pages (from-to)11-16
    JournalEconomics Letters
    Volume181
    DOIs
    Publication statusPublished - 1 Aug 2019

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