Profit Sharing: A Contracting Solution to Harness the Wisdom of the Crowd
2017 WFA, SFS Cavalcade
49 Pages Posted: 2 Oct 2016 Last revised: 8 Sep 2020
Date Written: April 5, 2018
When a group of investors with dispersed private information jointly invest in a risky project, how should they divide the project payoff? A typical common stock contract rewards investors in proportion to their initial investment, but does it make the best use of investors' crowd wisdom? By illustrating how a simple profit-sharing contract with decentralized decision making could often coordinate individuals' investment choices, this paper studies as a general contracting problem the role of profit sharing in harnessing the "wisdom of the crowd", and discusses specific implications for FinTech applications such as the security design of investment crowdfunding.
Keywords: contract theory, crowdfunding, financial innovation, FinTech, information economics, investment, security design, wisdom of the crowd
JEL Classification: C72, D53, D82, D86, G23
Suggested Citation: Suggested Citation