Issues in Crowdfunding: Theoretical and Empirical Investigation on Kickstarter

Abstract

This paper investigates public good and informational advertising issues in crowdfunding. When discussing public good aspect of crowdfunding, with reward-based platforms with minimum pledge threshold, such as Kickstarter, two goods need to be considered: (1) reaching the pledge threshold, and (2) rewards. This paper argues that, for reaching pledge threshold, the public can contribute either in financial pledges, or advertising effort. Because advertising effort is not rewarded, nor is it recoverable, it suffers problems related to private provision of public goods, with implications to contribution patterns. This paper also makes an initial foray into empirically estimating the effects of advertising on Kickstarter projects, and constructs a database recording the frequency of media mentions, backer updates, Kickstarter feature, and Twitter mentions. It finds that being featured on Kickstarter front page is associated with the greatest positive effect in pledges when compared to other forms of advertising. It also observes that a significant number of projects are repeatedly featured on the front page, raising the question of whether valuable advertising on the front page should be more evenly distributed between projects.

Keywords: crowdfunding, entrepreneurship, public good, private provision, informational advertising

JEL Classification: H41, L26, M37, O31