A Theory of Crowdfunding Dynamics

Abstract

This paper develops a dynamic model of crowdfunding to characterize success rates and welfare, identify optimal transparency and design policies and explain bidding profiles. Inspection costs have two effects on profiles: (1) decreasing pivotality, driven by reduced scope for strategic complementarity as the deadline nears, pushes the slope downwards; (2) a Jensen effect from bidding news also pushes the slope downwards for concave cost distributions, but upwards for convex costs. Combining can generate a U-shape. Non-disclosure of funding progress always yields higher welfare than full transparency given homogeneous costs. However, cost heterogeneity favours disclosure by enabling early bidders to activate otherwise passive, higher cost bidders. We also optimize pricing and thresholds under success-maximization.