Contingent Stimulus in Crowdfunding

46 Pages Posted: 3 Mar 2017 Last revised: 9 Apr 2021

See all articles by Longyuan Du

Longyuan Du

University of San Francisco - School of Management

Ming Hu

University of Toronto - Rotman School of Management

Jiahua Wu

Imperial College Business School

Date Written: August 1, 2017

Abstract

Reward-based crowdfunding is a form of innovative financing that allows project creators to raise funds from potential backers to start their ventures. A crowdfunding project is successfully funded if and only if the predetermined funding goal is achieved within a given time. We study the optimal timing of contingently placing a "fulcrum" in the random pledging process, with the potential of tilting it towards success, which would be a win-win-win for the creator, backers, and platform. Specifically, we consider a model where backers arrive sequentially at a crowdfunding project. Upon arrival, a backer makes her pledging decision by taking into account the expected success of the project. We characterize the dynamics of the project's pledging process. We show that there exists a cascade effect on backers' pledging, which is mainly driven by the all-or-nothing nature of crowdfunding projects. According to our data collected from the most popular online crowdfunding platform, Kickstarter, the majority of projects fail to achieve their goals. To address this issue, we propose three contingent stimulus policies, namely, seeding, feature upgrade, and limited-time offer. As a result of the cascade effect on backers' pledging, the optimal timing to apply stimulus policies has a cutoff-time structure. Lastly, we show that the benefit of contingent policies is greatest in the middle of crowdfunding campaigns. Testing with the dataset of Kickstarter, we obtain empirical evidence that the projects' success rates improve by 14.6% on average with updates in the middle of the campaign and when the pledging progress is lagging.

Keywords: crowdfunding, dynamic policy, revenue management

JEL Classification: C73

Suggested Citation

Du, Longyuan and Hu, Ming and Wu, Jiahua, Contingent Stimulus in Crowdfunding (August 1, 2017). Rotman School of Management Working Paper No. 2925962, Available at SSRN: https://ssrn.com/abstract=2925962 or http://dx.doi.org/10.2139/ssrn.2925962

Longyuan Du

University of San Francisco - School of Management ( email )

San Francisco, CA 94117
United States

Ming Hu (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George st
Toronto, ON M5S 3E6
Canada
416-946-5207 (Phone)

HOME PAGE: http://ming.hu

Jiahua Wu

Imperial College Business School ( email )

Tanaka Building
South Kensington Campus
London, SW7 2AZ
United Kingdom
02075949851 (Phone)

HOME PAGE: http://www3.imperial.ac.uk/people/j.wu

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