Crowdfunding Under Market Feedback, Asymmetric Information And Overconfident Entrepreneur

Abstract

This article is the first one that considers a model of the choice between the different types of crowdfunding, which contains elements of the asymmetric information approach and behavioral finance (overconfident entrepreneurs). The model provides several implications, most of which have not yet been tested. Our model predicts that equity-based crowdfunding is more profitable than reward-based crowdfunding when an entrepreneur is overconfident. This is because the entrepreneur learns from the sale of shares before making production decisions. The model also predicts that an equilibrium can exist where some firms use equity-based crowdfunding, which contrasts the results of traditional theories (which have rational managers), for example the pecking-order theory. It also contrasts traditional behavioral finance literature (e.g. Fairchild 2005) where equity is not issued in equilibrium.

Keywords: entrepreneurial finance, crowdfunding, asymmetric information, overconfidence, equity-based crowdfunding, reward-based crowdfunding, entrepreneurship and learning

JEL Classification: D82, G32, L11, L26, M13