Experimental Study of Crowdfunding Cascades: When Nothing is Better than Something

• In Event: 149 - Regular Session. Economic Sociology: Herds, Runs, Bubbles: Social Influences in Financial Markets

Abstract

Recent changes in technology have substantially increased fundraising opportunities for organizations, causes, and innovations. Online crowdfunding marketplaces allow fundraisers to aggregate funds, often in small amounts, to reach a publicly announced fundraising goal from a myriad of investors who participate in these open marketplaces. This stands in stark contrast to traditional fundraising markets that restrict participation to those with large amounts of monetary and social capital. We conduct a randomized field experiment to better understand how (if at all) first contributors affect subsequent investment activity in these new crowdfunding markets. To accomplish this, we randomly selected new projects and either made no contribution, a small contribution ($5), or a moderate-sized contribution ($40). Consistent with prior work on social influence, we find that projects to which we made a moderate-sized first contribution slightly outperform projects which received no contribution even after accounting for the fact that projects are closer to their fundraising goals. Contrary to prior work, we find that small initial contributions significantly decrease the chances of success for a project. This asymmetry in influence implies that not only do those with the resources to make large contributions have disproportionate influence, but paradoxically that those with limited means may actually undermine their own preferences by participating in these fundraising marketplaces. Ironically, this asymmetry likely produces funding patterns that are less reflective of market participant preferences than a more exclusionary and closed marketplace would be.

Authors

• Rembrand Michael Koning, Stanford University

• Jacob Model, Stanford University